Citigroup strategists say the focus moving forward will fall on data
Federal Reserve chairman Kevin Warsh may be driving a more hawkish central bank. Citigroup has an idea on how to play that.
The trading week is pointing to a positive start as tensions appear to be cooling a bit between the U.S. and Iran. Investors are also awaiting earnings from Meta, Microsoft, Amazon and Apple, with heavy attention on the state of artificial-intelligence spending from those big tech names.
Potentially stealing the spotlight this week will be a Federal Reserve meeting, with the chances of an interest rate hike up to 31% from a week ago following a recent spike in oil prices.
Our call of the day from Citigroup offers some stock advice for investors wary of a surprise hike from new Fed Chairman Kevin Warsh and/or a tone that suggests more tightening to come.
While there's no "clear consensus" for that meeting, a hawkish outcome would be a risk for stocks, said a Citi team led by Stuart Kaiser, head of U.S. equity trading strategy. Even if the central bank holds steady in July, chances are at more than 70% for a hike in September, therefore Citi doesn't see much relief coming for markets after this week's meeting.
As Warsh has promised less communication over interest-rate intentions, investors will have no choice but to turn their attention to data and the next meeting in two months.
Kaiser and his team said the best move to protect against a Fed hike or a more hawkish central bank is to buy put options on the iShares Russell 2000 ETF IWM. Put options allow an investor the right to sell an asset at a specified price within a set time frame, and are commonly used if one suspects a selloff might be coming.
"A data-dependent FOMC [Federal Open Market Committee] and lower index weights in growth and momentum stocks should make IWM more sensitive to reported economic data and FOMC policy decisions and behave more cyclically than in recent history," they told clients in a note published Sunday.
They explained that a June rebalance for the small-cap focused Russell 2000 RUT has helped lower its implied volatility, by fixing some distortions that made it less responsive to economic data than traditionally.
For example, over the past two years, the index was overly tilted toward growth and price momentum stocks, which made it more sensitive to rates and credit spreads over data.
Those Russell put options are now a cheaper hedge as some of the more volatile names have been stripped out. Average three-month implied volatility - future expectations of volatility - of the 10 biggest stocks on the index is down to 56% from 90% with realized volatility at just over 48% in the past month, they noted.
Implied volatility for the iShares Russell 2000 ETF below peers.
Looking at index-weighted realized volatility across all Russell 2000 member stocks (RTYM27), they said volatility has dropped by around five points over the last three months.
While the start of earnings season has been stronger, "the bar is clearly higher as the average stock is down 10 basis points on the day they report." The strategists have a preference for materials, banks, Nasdaq-100 tracker QQQ QQQ and their basket of AI power generation stocks.
Citi strategists said while they are positive on stocks through month-end at least, investors should proceed cautiously. "Post megacap earnings, we expect stocks will be more sensitive to higher yields, rising oil and imminent equity supply ahead of a traditionally weak seasonal period," they said.
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are surging and Treasury yields BX:TMUBMUSD10Y are dropping. That's after oil prices (CL.1) (BRN00) sank as the U.S. and Iran paused hostilities, with hopes rising for another round of negotiations.
Key asset performance Last 5d 1m YTD 1y S&P 500 7411.98 -0.61% 0.79% 8.28% 16.02% Nasdaq Composite 24,975.82 -2.13% -1.27% 7.46% 18.32% 10-year Treasury 4.638 4.10 25.90 46.60 22.10 Gold 4099.7 2.19% 1.72% -5.37% 23.71% Oil 82.53 0.13% 17.20% 43.76% 23.22% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
China memory-chip maker ChangXin Technology Group surged more than five times from its initial public offering price in a blockbuster debut in Shanghai.
Nvidia (NVDA) is reportedly in discussions to provide around $250 billion in financial backing for OpenAI to lease a massive Ohio data-center project.
Durable-goods orders are due at 8:30 a.m. Eastern.
Chickens and pigs could be big winners from AI's $300 billion philanthropy wave
The chart
Apollo chief economist Torsten Sløk flags this chart that shows how investors shouldn't write off all software as vulnerable to AI disruption. The chart shows strongly performing security and infrastructure, which provides "critical data backbones, compute pipelines and complex protection systems that generative models actively expand rather than displace." Weaker areas are application and vertical software owing to worries about fallout from automated AI workflows. "The bottom line is that the market is clearly favoring foundational security and infrastructure layers over legacy applications as artificial intelligence reshapes software business models." The iShares Expanded Tech-Software Sector ETF IGV is down 16% so far this year.
Top tickers
These were the top-searched tickers on MarketWatch as of 6 a.m.:
Ticker Security name TSLA Tesla SPCX SpaceX NVDA Nvidia MU Micron TSM Taiwan Semiconductor Manufacturing Co. AMD Advanced Micro Devices INTC Intel AAPL Apple MSFT Microsoft SNDK Sandisk
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July 27, 2026 07:22 ET (11:22 GMT)
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