Citi is forecasting a performance rotation from AI “enablers” to AI “adopters” as markets head into a more volatile 2026.
As the bull market enters its fourth year, Citi expects volatility to pick up, making it harder for investors to identify clear winners and losers in the AI race. Even so, strategists see enough macro support to remain constructive on equities. An accommodative Federal Reserve, earnings growth above consensus, and a stronger fiscal impulse from the OBBBA underpin Citi’s year-end S&P 500 target of 7,700.
That forecast sits above the MarketWatch-compiled consensus of 7,500, which already implies roughly 10% upside from Friday’s close.
Citi expects total stock market returns of about 13% in 2026 but anticipates a shift in leadership away from companies that enable AI infrastructure and toward firms that successfully adopt AI to improve productivity. Performance is also expected to broaden across index constituents.
Starting from a high valuation base, U.S. equities will face intense pressure to deliver solid fundamentals to justify current prices. The 7,700 target, laid out by Scott Chronert along with Drew Pettit and Patrick Galvin in Citi’s 2026 U.S. equity outlook, assumes S&P 500 earnings of $320 per share and a valuation of 24 times earnings.
That represents only modest multiple compression from the current level near 25 times, but Citi warns that stock selection and sector allocation will become more challenging as return dispersion increases, particularly within AI-related stocks.
Wall Street consensus earnings estimates for 2026 stand closer to $310 per share, according to Citi, though the firm highlights the continued resilience of earnings so far.
While AI tailwinds remain intact, Citi expects investor focus to gradually move away from hyperscalers, whose long-term outlook remains debated, toward companies that can effectively integrate AI into their operations and translate it into productivity gains. The strategists also anticipate more “idiosyncratic behavior” among AI enablers, noting that these stocks account for roughly 40% of the S&P 500, complicating portfolio construction.
To position for broader market participation, Citi recommends looking for positive earnings revision momentum in value, cyclical, and small-cap stocks. Growth stocks—particularly mega-cap technology names—will need consistent earnings beats and upward guidance revisions to sustain both performance and valuations.
Citi’s 7,700 target also reflects expectations that the Federal Reserve will cut rates twice in early 2026, sooner than markets currently price in, as rising unemployment—potentially driven by AI-led productivity gains—begins to weigh on the economy. The firm forecasts the U.S. 10-year Treasury yield at 3.75% by the end of 2026, down from about 4.18% today.
In a bullish scenario where earnings growth exceeds expectations, Citi sees upside to 8,300 on the S&P 500, one of the more optimistic calls on Wall Street. Conversely, if fundamentals disappoint and valuation multiples contract, Citi’s bear-case target falls to 5,700.
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