Citi expects the post-pandemic bull market in US equities to continue into 2026, albeit with increased volatility.
The Wall Street bank describes its forecast as a "resilient but volatile bull market," arguing that equity fundamentals remain supported despite valuation pressures and macroeconomic contradictions.
Citi believes 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 proxy for the US (Main Street) economy," stated strategists led by Scott Kronert in a second report, noting that global conditions remain generally favorable for index-level returns.
Citi's forecast is based on an earnings-focused S&P 500 model. The bank sets a 2026 baseline of 7,700, underpinned by what it considers an "aggressive profitability index of $320."
Citi also lists a low-hanging fruit of 8,300, which suggests stronger earnings growth and moderately higher multiples, while a low-hanging fruit of 5,700 reflects the risk of earnings disappointment and a contraction in multiples.
Strategists note that positive earnings surprises, supportive Federal Reserve policy, and positive fiscal momentum could help support current performance levels.
They believe earnings growth should be driven by individual stocks. While mega-cap growth remains the most important driver for achieving the index's targets, we argue that an "expansion strategy" is also crucial, pointing to improving fundamentals across the index. The bank expects so-called "The Other 492" stocks to emerge from the earnings recession in 2024 and overcome tariff headwinds in 2025, with expectations now pointing to double-digit growth in 2026.
While AI remains a central element of Citi's structural bullish case, the tone is more nuanced than last year.
Citi maintains that AI is "more than a bubble," but is increasingly under scrutiny as investment growth slows.
Productivity improvements are described as "the core of our structural bullish case," although strategies caution that funding requirements, investment returns, and market implications represent significant upsides.
Citi's sector positioning remains selective heading into 2026. The bank is overweight healthcare, financials, information technology, energy and materials, maintaining a neutral weighting in utilities, industrials, and communications services.
Commodity selection: energy and commodity producers are weighted heavily. Consumption is underweight, reflecting a more cautious stance regarding regional demand.
At the sector level, Citi continues to favor semiconductors, software, banks, and healthcare equipment, aligning its positioning with rising profits, improved productivity, and returns on capital, rather than a purely cyclical recovery.
On policy, Citi views the Federal Reserve as "on a path to neutrality," with inflation a lesser concern in terms of labor market conditions.
Lower interest rates are being used by the company, but the Wall Street firm is managing the tension between productivity growth and weakening activity.
Citi also expects the fiscal policy uncertainty seen in 2025 to usher in more stimulative measures as the midterm elections approach.