While global markets were shaken by non-farm payroll data, Citigroup has bucked the trend by increasing its bullish stance on US stocks: it has raised its S&P 500 target, arguing the AI bull market is only halfway through, while maintaining its expectation for interest rate cuts within the year.
On June 5th, the Nasdaq Composite Index closed down 4.18%, marking its largest single-day drop since April 2025. The Philadelphia Semiconductor Index plummeted 10.26%, with the chip sector losing over a trillion dollars in market value in one day, its worst performance since the March 2020 circuit breaker. In early trading the following Monday, South Korea's KOSPI index opened sharply lower by over 8%, falling below 7500 points and triggering a trading halt, with Japanese and Korean stock markets closing collectively in the red.
Also on June 5th, according to the Wind trading desk, Citigroup significantly raised its year-end 2026 target for the S&P 500 index to 8100 points, based on an "unprecedented" AI capital expenditure supercycle.
Wall Street is currently in a state of extreme division: at the micro level, AI-driven earnings momentum is reshaping the fundamentals of US stocks at an unprecedented pace; at the macro level, inflation and employment data have forced almost all institutions except Citigroup to abandon expectations for a 2026 rate cut, with some even beginning to price in rate hikes.
Citigroup also warned in its report that as the index climbs towards 8100, downside skew risk is accumulating. With interest rate swap markets fully pricing in a December rate hike, the future trajectory of US stocks will heavily depend on whether companies can deliver on their AI profit promises. While investors embrace the AI dividend, they must be wary of valuation pressures stemming from tightening liquidity.
Significant Earnings Forecast Revisions: AI as a Truly Disruptive Force
Earnings are being revised upward at a rare pace, forcing Citigroup to reassess its full-year 2026 forecasts for US stocks.
Citigroup's baseline earnings per share (EPS) forecast for the S&P 500 entering 2026 was set at $320, which was already on the high side. Its bullish scenario of $330 was also considered "seemingly optimistic" at the time. However, the actual performance in the first quarter far exceeded expectations.
The actual earnings for the S&P 500 that quarter exceeded market consensus by about 13.4%, a magnitude of surprise historically seen only in the early stages of recovery from an economic recession—yet no recession is currently in the background. Citigroup admitted that it has not seen a similar situation in the past four decades.
Based on this, Citigroup has raised its full-year 2026 EPS forecast to $350. The specific path assumes that each of the second through fourth quarters records an approximately +5% surprise relative to consensus expectations, corresponding to about $81 in Q2, $88 to $93 in Q3, and $90 to $95 in Q4. This calculation implies a full-year EPS of about $355, which is then slightly adjusted down to $350 as a "conservative and reasonable" single-point estimate.
For 2027, Citigroup provides a preliminary forecast of $400, corresponding to an approximate 14.3% earnings growth rate (baseline scenario), while also noting that the sustainability of AI fundamental benefits beyond 2027 remains highly uncertain.
A Capital Expenditure "Supercycle", Not a Traditional Cycle
Citigroup explicitly rejects defining the current environment as a "traditional cycle," believing a more accurate description is a one-off capital expenditure supercycle. It is currently in the "middle innings," which means:
Earnings growth momentum has not yet peaked, but the phase of fastest growth may have passed;
Future price-to-earnings (P/E) ratios will face pressure, and contraction should be expected for both trailing and forward P/E ratios;
Future index gains will increasingly rely on earnings growth itself, rather than valuation expansion.
Citigroup particularly points out that the investment logic for current "AI picks and shovels" (i.e., AI infrastructure suppliers) has been fully recognized by the market. This is precisely the root of the asymmetric expansion of downside risk—the more widely known a theme is, the faster the market pricing reverses once signs of deceleration appear.
Positive Surprises May Persist, But Magnitude Will Narrow
Looking at short-term catalysts, Citigroup believes that above-normal positive earnings surprises may still occur in the second and third quarters, primarily from two sources:
First, the lag effect in analyst forecasts continues. Taking Nvidia as an example: the fastest upward revisions to its forward earnings occurred in late 2023, with NTM EPS being raised by as much as 285% within 6 months. Since then, analysts have gradually "caught up," narrowing the surprise magnitude, but the stock price continued to rise. Currently, the 6-month change in NTM EPS for the equal-weight technology sector is still rising, indicating that collective analyst adjustments may need another one or two quarters to catch up with reality. This dynamic has spread from Nvidia to memory chips and further to tech hardware and downstream data centers.
Second, tariff refund effects may bring short-term, one-time gains. In the first quarter, some companies had already booked expected refunds as receivables, while another group adopted a wait-and-see approach. Refunds for the former are already on the books, while actual refunds for the latter may materialize as earnings surprises in the second quarter; furthermore, refunds received by suppliers may benefit purchasing companies in the form of lower cost of goods sold (COGS) in the second half of the year.
Valuation Cliff and Asymmetric Risks
Despite raising its price target, Citigroup's report is filled with caution regarding a "valuation cliff." It clearly states that the future driver of the index will be earnings growth, not valuation expansion. In fact, the 8100-point target implies a lower trailing P/E ratio than before.
The market has fully recognized the "selling picks and shovels" trade logic and has likely priced AI-related growth through 2027. However, the fundamental transmission from 2028 to 2030—from AI providers to a broader base of AI users, translating into actual productivity—remains opaque.
Considering the sharp declines on Friday and this Monday, the investor's situation is clear: this is a market with extremely low tolerance for error. The convergence of forward P/E ratios for growth stocks towards their 10-year average does not require significant compression, but due to their high weight in index earnings, this valuation adjustment will be amplified for the S&P 500. As Citigroup warns, as the index rises, earnings momentum is increasingly priced in, and investors must prepare defensively for heightened volatility in the coming months due to sentiment swings and interest rate speculation.
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