Source: Sharecast
In its base case scenario, the bank sees the S&P 500 hitting 7,700 by the end of next year, up from Friday's closing price of 6,827.41 – a slight dip from Thursday's all-time closing high of 6,901.00 following a year-to-date gain of nearly 16%.
Its bull case target puts the index at 8,300 by 2026 year-end, while the bear case is 5,700, with Citi pointing to a "high valuation starting point" increasing the downside risk compared to upside potential.
"To be clear, a high valuation starting point is a hurdle for the market, but not an insurmountable one. Rather, it puts increasing pressure on fundamentals to support the price action," Citi said.
Overall, three key things are expected to support growth in 2026: upside earnings surprises: an accommodative stance by the Federal Reserve, with Citi predicting two straight interest-rate cuts to start the year; and positive fiscal stimulus measures.
While huge gains in the AI and chip sectors have driven the market to all-time highs – simultaneously raising bubble concerns given sky-high valuations in the tech sector – the bank said it expects an "incremental shift from AI enablers to adopters/users in 2026, setting the stage for increased productivity improvement commentary across corporate".
Meanwhile, corporate earnings are expected to be strong, with the bank ahead of consensus across most sectors in terms of growth targets, particular in value, cyclical and small to mid-cap names.
"The growth cohort needs ongoing beats-and-raises to support performance and valuations, while the rest of the market should benefit from either a positive revision or more confidence in forward growth," Citi said.