Citigroup sees small-cap opportunity ahead of key CPI report

what happened

MarketWatch reports that Citigroup is directing investors toward beaten-down smaller U.S. companies ahead of September’s consumer-price report. The data is due Wednesday at 8:30 a.m. Eastern, while Wall Street analysts expect monthly core CPI, excluding food and energy, to slow to 0.2% from 0.3% in August.

Stuart Kaiser, Citigroup’s head of U.S. equity strategy, identified the iShares Russell 2000 ETF (IWM) as the preferred exposure before the release. The fund tracks 2,000 U.S. small-cap companies. The Russell 2000 has fallen 5.6% across five straight weeks, its longest losing run since May 2022, and is nearly 9% below the 52-week high reached on Aug. 13.

Kaiser said softer inflation could support rate-sensitive areas including IWM, XLU and XLRE. Citigroup also pointed to elevated short interest in IWM: a further 4.3% increase would force quantitative funds to cover short positions and move into bullish long positions, according to the bank. Kaiser recommends IWM call options, while Citigroup remains tactically positive on large-cap growth stocks, including QQQ, ahead of third-quarter earnings.

why it matters

The CPI report will shape expectations for the Federal Reserve’s next meeting, scheduled in just over two weeks and widely expected to leave interest rates unchanged. Lower inflation and bond yields could improve equity sentiment, particularly in rate-sensitive sectors.

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