Citi has raised its earnings forecasts for S&P 500 companies after stronger-than-expected results and improving corporate fundamentals. The firm now expects the benchmark index to reach 8,100 by 2026, despite lowering the valuation multiple applied to its forecast.
BNN Bloomberg spoke with Drew Pettit, U.S. equity strategist at Citi, about the earnings outlook, the sustainability of AI-driven investment spending and the stock opportunities the firm sees across large growth and small value companies.
Key Takeaways
- Citi raised its 2025 S&P 500 earnings-per-share forecast to US$350 from US$320 after stronger-than-expected corporate results and guidance.
- The firm increased its 2026 S&P 500 target to 8,100, with stronger earnings growth more than offsetting a lower valuation multiple.
- Citi believes ongoing AI investment remains supported by strong cash generation among hyperscalers, helping sustain earnings momentum.
- The firm continues to favour a barbell strategy that combines large growth companies tied to AI infrastructure with select small value stocks showing improving fundamentals.
- Citi highlighted Fortrea Holdings and Celanese as examples of companies benefiting from rising earnings expectations after periods of low investor expectations.
Read the full transcript below:
LINDSAY: Citi has increased its earnings estimate for how much S&P 500 companies will earn, and based on these higher earnings estimates, they now think the S&P 500 could reach 8,100 by 2026. Let’s get more now from Drew Pettit, U.S. equity strategist at Citi. It’s great to have you join us. Thank you.
DREW: Hi, Lindsay. Thanks for having me in.
LINDSAY: So you’re calling for much stronger earnings than the market. What do you see here that you think others might be missing?
DREW: Look, we always thought earnings were going to be strong, the operations really good. You’re seeing a lot of good quality improvement, not just high quality in the market. The difference is the momentum is there. And look, at the beginning of the year, we were expecting 320 in earnings for the S&P 500. That was a Street high, but the results came in way, way, way stronger, outlooks up, companies still flush with cash, really funding the AI buildout. And now we’re moving that target to 350. So to us, it’s earnings momentum. The funding is there. The AI buildout is real. We just think that continues to push earnings estimates higher.
LINDSAY: So, a 20 per cent jump in earnings, that’s a big call. I wonder, what could possibly derail that outlook?
DREW: It’s the cash. Do you have money to build out everything you want? Number one. And then number two, is the monetization there on the other end for big secular themes like AI? As long as we feel good about the cash returns and future returns for the hyperscalers, you’re going to feel really comfortable about building out the back end. So to us, I would say the cash return on investment for the hyperscalers is starting to level out, so we think the confidence is coming back. And you clearly see that in the large-cap growth part of the U.S. market.
LINDSAY: You also cut your valuation multiple, but you raised your market target. What do you think is doing the heavy lifting there?
DREW: When you think about valuation, look, earnings are one thing, but how much you’re willing to pay for earnings is actually not necessarily set just by equity markets. So you have to think about rates. At the beginning of the year, we didn’t think 4.5 to 5 per cent was really in the cards for long-end rates in the U.S. That seems a little bit stickier now, the inflation story not quite as clean. So to us, we’re cutting that valuation multiple. We thought it’d be 24.5 times in this perfect Goldilocks scenario. There’s some issues with that thesis, but still growth is strong enough to sustain, let’s call it 23 times. So look, nothing’s cheap, we get that, but it’s not perfect out there, so we’ve got to take that multiple we’re willing to apply to a really good earnings number down just a hair.
LINDSAY: Okay, so your focus is on a narrower set of single-stock opportunities. I want to go through some of these with you, find out your thesis. You’ve got some large growth stocks, so that’s Teradyne, Caterpillar, Palantir and Quanta Services. Tell us more about this group first of all.
DREW: Okay, Teradyne, semi buildout. It’s not just about memory chips or inference chips. Semi-cap equipment to get the stuff out the door. Teradyne exposed to that, continuing to beat estimates, continuing to kind of raise margins, price, and continuing to grow from a volume perspective. All solid for Teradyne.
Palantir, now software got hit pretty hard at the beginning of the year. We think this one de-risked quite a bit. Honestly, this is about custom AI and software that necessarily may not be disrupted but helped by AI. So this could actually be a long-run winner in the AI buildout, not something that gets replaced. Think this is really interesting. Again, another company with really good cash returns relative to its asset growth.
And then the other two stories, let’s lump Caterpillar and Quanta together. This is the physical buildout of AI. Now everyone thinks, can we build enough data centres? Will we get them out the door? In the meantime, the supply bottleneck is getting enough infrastructure names, whether it’s heavy equipment or people that can service the power side of these, up and going. So they have pricing power. Again, you’re expanding margins, you’re seeing good asset turnover, you’re seeing efficiency improvement in both of those businesses.
LINDSAY: When it comes to small value stocks, Steve Madden is one that you’re watching. Tell us why you’re watching Steve Madden.
DREW: Yeah, look, small value in general becomes a really interesting hedge when we have equity supply coming to the market. People are really worried about what that does for technical selloffs of other Nasdaq names and S&P names. So if you step outside of that, we’re talking about names here that are really unloved. Steve Madden’s had a really good move. It’s moved earnings expectations higher. You’ve seen an improvement in sales growth, EBITDA margins. The trough is behind us, so we see investors coming back here. We think that momentum continues as long as quality continues to improve for this company.
LINDSAY: Sonic Automotive is the other small value stock that you have. Tell us more about that one.
DREW: Look, we’re talking about auto. Auto dealers can’t be anything different than AI, right? And the market, even though this has moved back up closer to a 52-week high, if you really extend this out, people don’t expect much out of the auto sector, something less than 10 times earnings. And we’ve finally seen a company that is expecting to increase margins again. Our analysts have really high conviction here. They’ve moved the price target higher. We’ve seen better execution across its dealer segment and even, I would say, its services segment as well. So again, low multiple, but your earnings expectations moving higher for a company. Really interesting setup, and a good barbell with the large-cap growth names we mentioned.
LINDSAY: And then you’ve got two names that you say meet Citi’s high earnings momentum criteria. The first one, Fortrea Holdings. I’m wondering, why is that?
DREW: Really, really low expectations. This company services the biotech industry, and we’re moving off of a low. Almost two months ago, we were talking about a stock that was trading at Citi’s bear case for the name. But with the last couple quarters, you’ve seen a return to positive EBITDA, positive free cash flow. EPS estimates are moving higher. We don’t want to buy falling knives if earnings momentum, if earnings expectations are moving lower. We want to avoid those names, but this is one of the few where you’re starting to see that move higher off of low expectations.
LINDSAY: Lastly, Celanese is the other one that you say meets real high earnings momentum criteria. Why is that?
DREW: Similar story, but in a different industry: specialty chemicals. While the inputs are all oil-related, we’re finally seeing oil come down, which should be a benefit to this company going forward. Again, you’re not paying much for expectations to move higher off of a low base. We’re talking about eight times trailing earnings for this company. Again, we should see a bottoming in margins because they’re finally able to move along price, and at the same time, it’s a company that’s gaining share in some of the specialty chemical areas it competes in.
LINDSAY: Okay, we’ll leave it there. Drew Pettit, U.S. equity strategist at Citi. Really appreciate your time. Thank you for joining us.
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This BNN Bloomberg summary and transcript of the June 12, 2026 interview with Drew Pettit are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
