NEW YORK ( TheStreet) -- Even bullish calls sound a bit bearish these days. Citigroup went to overweight on U.S. equities on Wednesday, citing expectations for "solid" earnings growth and the easing efforts of the Federal Reserve. The firm also downgraded Japan, advised investors to "avoid" Continental Europe, and said it's overweight Asia excluding Japan and Australia. But the call carried some caveats as Citi said the global profits cycle is "clearly slowing." "The bad news for global equities is that profits are slowing around the world and EPS expectations need to be cut further, in our view," the firm said. "The current downgrade cycle is not over. The good news is that equity valuations remain cheap and central banks are prepared to embark on additional easing." The argument has been made that since it's well known that third-quarter earnings season will be weak, the impact of disappointing results will somehow be lessened but Citi still thinks there's plenty at stake. "It's still a macro-driven market -- We believe investors should be braced for a choppy 3Q12 earnings season, punctuated with cautious commentary and tepid topline growth due to macro slowing," the firm said. "The key will be discerning how this weakening scenario is already priced in and whether the market is willing to look through a soft 4Q12 as well." In this kind of environment, stock picking gets emphasized (rather than index-based investing), and Citi said it likes "higher-quality, late-cycle names, with better earnings visibility, including General Electric ( GE), Honeywell ( HON), and Danaher ( DHR)." "We expect the collective macro pressures in Europe and China, tougher comps for US growth + Fiscal Cliff worries, and the tempered growth outlook to dominate earnings season," the firm said. "Historically, 3Q is the sector's most lackluster quarter and we believe the setup should be mostly consistent with seasonal 3Q patterns with a relatively flat stock price performance." One group that's being pretty open about its growing bearishness is the retail investor. The latest sentiment survey from the American Association of Individual Investors found just 30.6% of those polled were bullish about where stocks are headed over the next six months, down 3.3 percentage points from last week.
It's the lowest level since a 30.45% reading for the week ended August 3 and well below the long-term average of 39%. The AAII has about 150,000 members but doesn't disclose how many participate in its survey each week. Bearishness swelled to 38.8%, a jump of 5.8 percentage points and the highest level since a reading of 43.1% for the week ended July 26. The neutral camp came in at 30.6%. Thursday was a pretty disappointing day for stocks with the Dow Jones Industrial Average reversing course and dropping more than 100 points from its session high to close at the low. Apple ( AAPL) resumed its recent decline, falling 2% to close at its lowest level since Aug. 10, while the Nasdaq has now retreated nearly 5% from its intraday high for the year. Yes, the S&P 500 eked out a miniscule gain to break a four-day losing streak, but that's not much of a consolation prize. As for Friday's scheduled news, earnings season picks up steam Friday with two big banks opening the books before the opening bell, JPMorgan Chase ( JPM) and Wells Fargo ( WFC). JPMorgan is still feeling the fallout from the London Whale debacle with the latest reports saying Chief Financial Officer Douglas Braunstein may on the way out. The average estimate of analysts polled by Thomson Reuters is calling for the Dow component to report a profit of $1.24 a share in the September-ended period on revenue of $24.53 billion. A big subject for Wells Fargo will no doubt be the lawsuit the bank is facing for its mortgage practices related to the financial crisis. Wall Street is looking for earnings of 87 cents a share from the San Francisco-based company on revenue of $21.47 billion. Wells shares are up nearly 28% in 2012, edging appreciation of 26% for JPMorgan. Guggenheim Partners is expecting big things from the large-cap banks this quarter. The firm has buy ratings on both Wells and JPMorgan with price targets of $43 and $50, respectively. "We are forecasting 4% sequential growth in operating earnings per share this quarter, twice the current market expectation," the firm said. "This would represent the 7th positive quarterly earnings surprise since 4Q10. Furthermore, Large Cap Banks could hit post-recession new highs in profitability levels, as returns on tangible common equity could hit 14% this quarter."
Guggenheim said investors shouldn't worry too much about stagnation on the top line. "Don't get lost on the headwinds for revenue growth," the firm said. "As the Large Cap Banks are still in earnings recovery mode, efficiency improvements are just as important. After improving 1.7 percentage points in 2Q12, we forecast a 1.6 percentage point gain in 3Q12's efficiency ratio, which is responsible for ~100% of this quarter's expected sequential increase in operating EPS." Favorite picks for Guggenheim include Regions Financial ( RF), PNC ( PNC), and Citigroup ( C). "We are expecting operating earnings momentum improvements to drive RF's and PNC's stock prices higher, while we think C has a strong return-to-risk ratio and could display further progress in minimizing future exposure to Citi Holdings," the firm said, adding that it's looking for "favorable 3Q12E operating earnings surprises with double-digit annual growth" from Citigroup, JPMorgan, U.S. Bancorp ( USB), First Horizon National ( FHN), Regions, and SunTrust Banks ( STI). "We believe these seven Large Cap Banks are positioned to benefit the most by reporting better than expected earnings this quarter while continuing to generate strong earnings momentum," the firm said. Most of the banks with our unfavorable earnings expectations relative to market expectations are related to unusual items, and include Bank of America ( BAC), BB&T ( BBT), PNC and State Street ( STT). The inclusion of these large unusual items is inconsistent across the market estimates, making the consensus less useful for these banks." The economic calendar includes the producer price index for September at 8:30 a.m. ET; the preliminary University of Michigan consumer sentiment survey for October at 9:55 a.m. ET; and the Treasury Department's budget for September at 2 p.m. ET. And finally, Thursday's big warning du jour came courtesy Advanced Micro Devices ( AMD), which underscored the weakness in the PC market by forecasting a 10% sequential decline in revenue growth for its third quarter. The stock was last quoted at $2.90, down 9.4%, on volume of 1.9 million, according to Nasdaq.com. -- Written by Michael Baron in New York. >To contact the writer of this article, click here: Michael Baron.