Stocks will hit a crucial 'turning point' in early 2021 as virus-stricken industries recover — but major indexes will only see moderate gains as mega-cap tech lags, says Citi's US equity chief

• Citi's Tobias Levkovich told CNBC on Wednesday stocks will hit a 'turning point' around February of 2021 when industries hit hardest by the pandemic begin to recover, and names that have been boosted by the shift to work-from-home lag behind, unable to match their levels from spring of 2020.
• The chief US equity strategist said major indexes will only see moderate gains in 2021, however, as mega-cap technology stocks lose momentum and cyclical stocks take the lead.
• His 2021 year-end price target for the S&P 500 is 3,800—a 5.5% upside from current levels and more moderate than other Street estimates.
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Citi's chief US equity strategist Tobias Levkovich told CNBC on Tuesday the stock market will hit a "turning point" around February and March of 2021 as industries impacted by the pandemic recover and stocks boosted by the shift to remote work lag behind.

But while Levkovich says he sees a new group of sectors set to lead the market, he predicts only modest gains in the major indexes as a new rally among some stocks comes at the expense of heavily-weighted industries like tech.

Levkovich's 2021 year-end price target for the S&P 500 is more tempered than other Wall Street estimates. He sees the benchmark index reaching 3,800—a 5.5% upside from current levels. He sees the more cyclically dominated Dow Jones gaining 13% by the end of 2021 to reach 34,000.

Levkovich also said that mega-cap technology stocks will lag in 2021, and this will slow down the S&P 500's momentum.

"If you start losing some of the leadership from the very very large mega-cap trillion dollar type tech companies, that will act as a bit of a hindrance for the broad S&P," the strategist said.

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As a result, he sees a continued rotation into value stocks. Industrial and cyclical stocks will benefit from improving ISM and potentially more infrastructure spending from the government, while stocks in travel, hospitality, and entertainment are "so vaccine sensitive," and will only recover once a large portion of the population is inoculated, said Levkovich.

The stock chief expects market volatility in the next few months, but said that current progress on the vaccine front puts the stock market in "better shape." Levkovich also cited an improvement in credit conditions from the Fed's senior loan officer survey, and said that's a good nine-month leading indicator for cyclical economic activity.

"We should get improving trends looking into next year, particularly the second half," he added.