Citi expects the post-pandemic rally in US stocks to continue into 2026, albeit with increased volatility.
The investment bank describes its outlook as a continuing but volatile bull market, noting that equity fundamentals remain supported even with increasing valuation pressures and conflicting macroeconomic currents.
Citi believes that the S&P 500 should not be viewed as a proxy for the US economy.
We maintain the view that the S&P 500 (Wall Street) is not a direct reflection of the U.S. (Main Street) economy, strategists led by Scott Kronert said in a report on Tuesday, as global conditions continue to support the index's overall earnings.
At the heart of Citi's forecast lies an earnings-based framework for the S&P 500. The bank sets a baseline target for 2026 at 7,700 points for the index, supported by what it calls strong index earnings of $320.
City also sets an optimistic target of 8,300 points, which assumes stronger earnings growth and moderately higher valuations, while the pessimistic scenario at 5,700 points reflects the risks of disappointing earnings and shrinking multiples.
Strategists point out that positive surprises in earnings growth, supportive Federal Reserve policy, and positive fiscal stimulus could help maintain current valuation levels.
From their perspective, earnings growth is set to extend beyond the large-cap stocks. While large-cap growth companies remain crucial to achieving the index's objectives, the team emphasizes that a 'diversification' strategy is also critical, pointing to improved fundamentals among the rest of the index's stocks.
The bank highlights that the so-called other 492 stocks emerged from a slump in earnings in 2024 and weathered the headwinds of tariffs in 2025, with expectations now climbing into double-digit growth territory for 2026.
While artificial intelligence remains central to City's structural rise, the tone is more nuanced than in previous years.
Citi argues that artificial intelligence is more than just a 'bubble', but it is increasingly under scrutiny as investment intensity rises.
Improving productivity is described as central to our structural bullish argument, although strategists warn that financing requirements, return on investment, and labor market implications represent significant headwinds.
Citi's sectoral stance remains selective as we approach 2026. The bank is increasing its weighting in healthcare, financials, information technology, energy and materials, while maintaining its market weighting for utilities, industrials and telecommunications services.
The luxury and consumer staples sectors are underweight, reflecting a more cautious stance towards demand-sensitive areas.
At the industry level, Citi continues to favor semiconductors, software, banking and healthcare equipment, aligning its position with earnings growth, productivity gains and return on invested capital rather than purely cyclical recovery.
On the policy front, Citi believes the Federal Reserve is moving towards neutrality, with inflation being considered a lesser concern compared to labor market conditions.
Low interest rates are supporting stocks, but Wall Street is pointing to a potential tension between productivity gains and weak employment.
Citi also expects that the uncertainty in fiscal policy seen in 2025 will give way to more stimulus-oriented measures as the midterm elections approach.
