Citi's Head of Investment Strategy and Asset Allocation, Liao Jiahau, indicated that the bank's analysts project robust corporate earnings will continue to underpin elevated overall valuations for US equities. The analysts' earnings growth forecasts for most sectors exceed the broader market consensus, with expectations that market-wide earnings estimates will be revised upwards, particularly for value stocks, cyclical stocks, and small to mid-cap stocks.
He further elaborated that the bank maintains an "overweight" stance on US stocks for the year, citing historical data which shows no direct correlation between high valuations and subsequent returns. He believes three key factors will continue to favor US equities: interest rate cuts, strong corporate earnings support, and advancements in artificial intelligence. The increasingly healthy earnings environment for US companies is a crucial factor supporting their valuations.
A broad recovery in corporate profitability is evident this year, with S&P 500 sector earnings per share (EPS) forecasts anticipated to reach 16.3%, higher than last year's 13%. He pointed out that as markets begin to look past various policy issues from the Trump administration affecting 2025, and with the US economy largely stable or improving, confidence is high for a broad improvement in the fundamental earnings outlook for US stocks beyond the mega-cap growth companies.
Market volatility for US stocks in 2026 is expected to be similar to conditions in 2025, yet it may also present strategic buying opportunities. Liao Jiahau stated that the accelerating adoption of artificial intelligence remains the best indicator for gauging the health of demand, with revenue growth from the US's four major cloud giants reflecting market appetite for AI; combined cloud revenue for the third quarter reached $74 billion, with the year-on-year growth rate expanding by 2 percentage points to 30%.
Backlogs have also increased significantly, reflecting current supply constraints: specifically, hyperscale cloud service providers lack sufficient computing capacity to fulfill the accumulating orders. He noted that the bank's analysts view the current AI environment as a "boom" rather than a "bubble," with corporate capital expenditure trends remaining clear, and upward revisions to earnings estimates capable of supporting the stock market. However, with both valuations and expectations for earnings growth elevated, volatility is likely to persist as a market influence for the foreseeable future.