Citigroup strategists are dialing back their exposure to U.S. equities, warning that fading hopes for a swift resolution to the U.S.-Iran conflict are increasing downside risks for markets already rattled by an oil-driven shock. Strategists said they brought their U.S. small-cap overweight “back to zero” as part of a broader effort to cut equity exposure. The bank also reduced its overall equity allocation to neutral, citing a broad set of negative macro signals now flashing caution. “With most of our negative equity macro risk signals triggering, we continue to cut equity exposure, taking our allocation to neutral,” Citi strategists wrote in a note to clients. “The incentives for both Iran and Israel do not necessarily align with a quick end.” Small caps, which tend to be more exposed to economic cycles and financing conditions, are particularly vulnerable in an environment of higher energy prices and tightening liquidity. Citi said the escalation in oil markets coupled with a lack of progress toward a ceasefire has shifted the risk-reward balance against maintaining a bullish stance on these stocks. The escalation has put major pressure on U.S. stocks. The Nasdaq Composite fell into a correction Thursday, down more than 10% from a record set in October. The blue-chip Dow and the small-cap Russell 2000 are also nearing correction territory, each down about 9% from its all-time high. The S & P 500 is around 7% below its record. The Trump administration is seeking an end to the U.S.-Iran war, a conflict that has resulted in surging oil prices that’s already hurting voters at the pump and could cost Republicans their seats in the midterm elections. President Donald Trump extended a deadline to attack Iran’s energy infrastructure and said he would extend a pause to attack Iran’s energy facilities to April 6. “That resolution proposals have been exchanged between the US and Iran is a positive start, continued deadline extensions by the US are overall net negative for a resolution,” Citi said. Despite the mounting geopolitical risks, Citi noted that equity markets have yet to show signs of panic, a dynamic that leaves room for further downside if tensions intensify. Within equities, Citi maintained an overweight to U.S. stocks relative to Japan, where it shifted to an underweight stance.