Citi explains why US stocks have plenty of room to rally further after shrugging off their pullback

• US stocks still have plenty of room to rally despite the recent pullbacks, Citi equity strategists said in a client note on Tuesday.
• Investors added $16 billion of net long positions in US stocks last week, and ETFs saw inflows, according to Citi.

Citi offers stock investors jittery about the recent pullbacks a silver lining: There's room for the rally to continue.

In a note sent to clients on Tuesday, Citi strategists led by Chris Montagu wrote that investors' "risk appetite" hasn't waned despite the latest dip. He cited investors adding $16 billion of net long positions in US stocks as well as inflows for equity ETFs. That "leaves room for flows to support a further rally in US equities," the strategists said,

"The net positioning is not overly stretched at current levels ... meaning there is room for the flow momentum to continue, i.e. for investors to add further risk exposure," they wrote in the note.

Kicking off 2024 with the largest first-quarter gains in five years, US stocks started April with a whimper following the release of strong PCE price index and an expansionary ISM manufacturing index, which briefly dampened the odds of a rate cut in June to less than 50%. Yet, Fed Chair Jerome Powell previously reiterated his dovish stance on monetary policies in the latest FOMC.

With all eyes on Friday's Labor Department jobs report, Montagu's squad warned of potential stock market turbulence if it falls short of expectations.

"If new jobs fall short of expectations or if the unemployment rate increases, this may pause the newfound flows momentum," they wrote.