Stock market volatility set to continue, warns Citi

• Conflict started at point of exceptionally strong sentiment and stretched valuations, with PE multiples 'effectively as high as ever' heading into the geopolitical shock
• Sharpest moves occurred in indices with strongest year-to-date returns, particularly Korea's Kospi
• Citi's positioning model shows still-elevated levels of both net and gross investor positioning outside of Nasdaq, indicating continued volatility risk

Summary

Key Development:

Citibank warns that stock market volatility is likely to persist as a Middle East conflict enters its sixth day as of March 5, 2026. The bank is assessing how much "market froth" has been eliminated following early-week selloffs.

Main Analyst Insights:

Beata Manthey, Citi's European equity strategy head, highlighted three critical observations:

1. Elevated Valuations: The conflict began when market sentiment was exceptionally strong with stretched valuations. PE multiples were at historical highs heading into this geopolitical shock.

1. Regional Impact: The sharpest declines occurred in indices with the strongest year-to-date returns, with South Korea's Kospi experiencing particularly significant moves.

1. Investor Positioning: Citi's equity positioning model shows elevated levels of both net and gross investor positioning outside the Nasdaq.

Market Implications:

The combination of high valuations, stretched positioning, and geopolitical uncertainty suggests equities will remain volatile and sensitive to news flow until a "plausible/concrete conflict resolution is in place." The unwinding of positions that occurred during the week's selloff may not be complete, indicating further potential downside risk.

Outlook:

Traders and investors should expect continued market instability, with equity performance heavily dependent on developments in the Middle East conflict. The elevated positioning across most markets (excluding Nasdaq) leaves room for additional de-risking if the geopolitical situation deteriorates or remains unresolved.