Citi Says Stocks Should Hold — But Flags a Volatility Risk From Rising Rates

Citigroup has warned about a potential volatility event tied to rising interest rates, even as its U.S. equity strategy desk stays positive on stocks at current prices. The dual message came from Citi's head of U.S. equity strategy, Scott Chronert, on a call covered by CNBC on January 26, 2026 (CNBC).

The tension here is between two forces pulling in different directions. Rising rate volatility can shake up bond prices, force large investors to adjust their hedges in a hurry, and widen the gap between what lenders charge and what borrowers pay across multiple asset classes. Yet stocks may keep absorbing those shocks as long as corporate earnings stay strong and economic growth holds up.

Chronert explicitly stated that equities should be fine at current levels (CNBC).

That statement is as much about how investors are currently positioned as it is about company fundamentals. Current stock prices reflect a specific risk premium — the extra return investors demand for holding equities over safer assets. If Citi's desk believes the market can hold these levels, the implication is that the trade-off between earnings growth and the rate used to discount future profits remains within a tolerable range, despite uncertainty about rates.

The broader context is that a volatility event — a rapid, non-linear repricing of risk, often triggered by forced selling or a break in carry-trades (where investors borrow in low-rate currencies to invest in higher-yielding ones) — carries real tail risk. Citi is flagging that this risk is directional, not random.

For institutional investors, the practical takeaway is not necessarily to cut stock exposure outright, but to hedge against rate-driven volatility or to position tail-risk hedges toward a scenario where rising rates trigger an equity pullback.

The reason this matters structurally: rising rates introduce cash flow uncertainty for companies carrying heavy debt loads, stress balance sheets loaded with long-duration assets (whose values fall sharply when rates rise), and can force risk parity and volatility-targeting funds to mechanically reduce their equity exposure if realized volatility spikes.

Equity resilience at current levels is a statement about the market right now. It is not a forecast that equity volatility will stay low, nor that credit spreads — the gap between corporate bond yields and Treasury yields — will remain tight if a rates event materializes.

For asset allocators, the Citi call implies a barbell approach: maintain equity exposure but respect the convexity risk (non-linear sensitivity to price changes) coming from the rates market.

For dealers and market-makers, the caution is a reminder that rising rate volatility increases hedging costs across their entire book, which can reduce their willingness to provide liquidity in equities and widen bid-ask spreads — the gap between what buyers will pay and sellers will accept — precisely when the relationship between rates and equities is unstable.

The most consequential unknown is whether any volatility event would be a flash repricing followed by stabilization, or a regime shift that forces volatility to stay elevated for an extended period.

In my view, the statement that "equities should be fine" is best read as a comment on valuation support and balance-sheet capacity, not a green light to ignore the downside risk.

The specific risk Citi is highlighting is that a rates-driven volatility event could force the normal relationships between asset classes to flip, catching relative-value and long-short equity strategies wrong-footed even if index levels hold steady.

For investors, the desk-level message is to separate conditional forecasts from unconditional positioning: stocks at current levels may be fundamentally supported, but the path to them need not be smooth, and the path matters for execution, financing, and risk management.

Citigroup's caution functions less as a directional sell signal and more as a flag to respect the non-linear way rising rates can transmit shocks into equities.