Citi expects the post-pandemic bull run in U.S. equities to continue into 2026, albeit with heightened market volatility.
Citi characterizes its 2026 market outlook as “a Persistent But Volatile Bull,” arguing that U.S. equity fundamentals remain broadly supportive even as valuation pressures and macroeconomic crosscurrents intensify.
The Wall Street bank stresses that the S&P 500 should not be viewed as a proxy for the U.S. economy, highlighting the growing disconnect between corporate earnings and domestic economic indicators.
“We maintain the view that S&P 500 (Wall Street) is not a direct reflection of the U.S. economy (Main Street),” strategists led by Scott Chronert wrote in a Tuesday report, noting that global conditions remain broadly supportive for index-level earnings.
At the core of Citi’s outlook is an earnings-driven framework for the S&P 500. The bank sets a 2026 base-case target of 7,700, underpinned by what it describes as an “aggressive” $320 in index earnings.
Citi also outlines a bull-case target of 8,300, assuming stronger-than-expected earnings growth alongside modest valuation expansion. By contrast, a bear-case scenario of 5,700 reflects the risk of earnings disappointment combined with multiple compression.
Strategists add that upside surprises to earnings growth, an accommodative Federal Reserve, and a positive fiscal impulse could help sustain current valuation levels despite elevated market volatility.
Crucially, Citi expects earnings growth to broaden beyond mega-cap stocks. While large-cap growth remains essential to achieving index targets, the team emphasizes that earnings participation across the broader index will be critical, pointing to improving fundamentals among non-mega-cap constituents.
Citi highlights that the so-called “Other 492” stocks—the S&P 500 excluding mega-cap leaders—emerged from an earnings recession in 2024 and successfully navigated tariff-related headwinds in 2025. Looking ahead, the bank expects earnings growth for this broader cohort to accelerate into double-digit territory in 2026, reinforcing its “broadening” thesis.
While artificial intelligence remains central to Citi’s structural bull case, the tone has become more nuanced compared with prior years. Strategists argue that AI is “more than a bubble,” but increasingly subject to investor scrutiny as capital intensity rises and expectations normalize.
Productivity gains are described as “core to our structural bull argument,” yet Citi cautions that funding requirements, return on investment discipline, and labor market implications represent meaningful headwinds that could temper enthusiasm over time.
Heading into 2026, Citi’s sector positioning remains selective. The bank is Overweight Health Care, Financials, Information Technology, Energy, and Materials, while maintaining Market Weight positions in Utilities, Industrials, and Communication Services.
By contrast, Consumer Discretionary and Consumer Staples are Underweight, reflecting a more cautious stance toward demand-sensitive sectors amid evolving macro conditions.
At the industry level, Citi continues to favor Semiconductors, Software, Banks, and Health Care Equipment, aligning exposure with earnings durability, productivity enhancement, and return on invested capital, rather than relying on a purely cyclical rebound narrative.
On the policy front, Citi sees the Federal Reserve “on a path to neutral,” with inflation viewed as a secondary concern relative to labor market dynamics. While lower policy rates remain supportive for equity valuations, strategists flag a potential tension between productivity-driven efficiency gains and employment softness.
Citi also expects the fiscal policy uncertainty of 2025 to gradually give way to more stimulus-oriented measures as midterm elections approach, adding another potential tailwind for U.S. equities.
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