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Citi upgraded U.S. stocks to neutral from underweight, as a pause in Federal Reserve rate hikes becomes more likely and the U.S. economy fares better than expected. “With a recession not imminent yet, and the Fed in the very last innings of its hiking cycle, we think that U.S. equities may well do better once the Fed actually does go on hold – in line with the pattern of the last 30+ years,” strategists led by Dirk Willer wrote. The Fed has raised rates 10 times since March 2022 to curb inflation not seen in decades. But central bank officials have recently indicated that further tightening may not be needed, partly because of the turmoil in the banking sector that will do part of the job for them. “The financial stability tools helped to calm conditions in the banking sector. Developments there, on the other hand, are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” Fed Chair Jerome Powell said last week . “So as a result, our policy rate may not need to rise as much as it would have otherwise to achieve our goals.” Citi also pointed to strength in U.S. tech stocks as a reason for the upgrade, as excitement around artificial intelligence boosts the sector. “AI may continue to remain a kicker, given that it is not far enough developed to disappoint expectations yet,” Citi said. “Given that AI is mostly a U.S. mega large cap theme, this should also reduce the risk of any U.S. underperformance. We implement this view by moving the U.S. back to neutral, and in the sector section, going overweight the tech sector.” AI-related stocks such as Microsoft and Nvidia have been on fire this year, as investors try to capitalize on the latest craze. Microsoft shares are up nearly 36% in 2023, while Nvidia reached an all-time high Thursday and has soared 160%. — CNBC’s Michael Bloom contributed reporting.