The AI-fueled rally in US stocks is too narrow - and that's setting up the market for a 'digestion phase', Citi strategist says

• The hype over AI has driven a narrow rally in stocks - gearing equities up for a "digestion phase," a Citi strategist said.
• "This is not a broader market move. This is a very narrow move if you will from that perspective," he said.

Excitement around artificial intelligence is driving a narrow rally in US stocks - and that's gearing equities up for a "digestion phase," according to Citi Bank's US equity strategist.

US technology shares have seen a massive jump this year thanks to investor frenzy over AI, with the Nasdaq 100 up about 37% this year. Stocks of tech giants such as Microsoft and Nvidia - seen as well positioned to benefit from the AI revolution - have been at the forefront of the rally, and have helped lift benchmark indexes.

However, several market experts have raised concerns whether the equity-market rally is sustainable, given that the gains are mostly concentrated in just one sector.

"We've got the euphoria around AI that's driven the growth component of the market, whether its the Nasdaq components or whether its a broader growth cluster," Citi's Scott Chronert told CNBC in a Tuesday interview.

"This is not a broader market move. This is a very narrow move if you will from that perspective. It's predicated on long-term promise. Our concern is that that long-term promise isn't yet showing up in the fundamentals, it'll take some time for that to happen – it'll happen – but between here and there, we think we're setting up for a bit of a digestion phase," Chronert added.

Market experts including JPMorgan's top strategist Marko Kolanovic have warned that the surge in tech stocks has been so steep that an asset bubble is in the making in the sector. That puts the shares at risk of a setback once the AI hype in markets wanes.