Citibank Maintains 2025 Target for S&P 500 at 6500, Signals AI Tailwinds

Citibank analysts have expressed a positive outlook for U.S. equities, setting a base case target of 6500 for the S&P 500 by 2025. This projection is based on expectations of mid-single-digit gains following returns of over 20% for two consecutive years.

Citibank's forecast hinges on the potential for a soft economic landing and the benefits of artificial intelligence, as well as the impact of the Trump administration's policies. Analysts believe that the performance of the S&P 500 will not directly reflect the broader U.S. economy due to the indices' composition and the specific effects of federal policies. They foresee continued recovery from the global recession caused by the pandemic, with expectations of rising volatility in the coming year.

Citibank emphasizes the ongoing importance of mega-cap growth companies as significant drivers of S&P 500 returns. However, a new trend is emerging where earnings growth is converging towards small and mid-cap companies, value stocks, and specific industry groups or sectors, presenting new trading opportunities.

While the Federal Reserve's expected interest rate trajectory suggests a higher interest rate environment compared to the post-financial crisis period, U.S. equities have shown resilience, indicating that a "higher for longer" interest rate scenario may not be detrimental to the market.

Focusing on profitability and efficiency improvements remains central to the fundamentals and valuations of stocks. Citibank underscores the critical importance of confidence in earnings growth through operational leverage, considering the current valuation starting point for investors.

Citibank also identifies thematic fundamental tailwinds that may provide single-stock and tactical alpha opportunities in the anticipated high-volatility environment, citing artificial intelligence and Trump policies as examples.

The firm's thematic strategy framework indicates that the "Fabulous 7," market capitalization-weighted mega-cap stocks, delivered approximately 48% returns in 2024, significantly contributing to the overall performance of the S&P 500. The valuations of these mega-cap stocks differ substantially from the rest of the index, and while they are high by historical standards, it is essential to consider the trajectories of earnings growth. Price-to-earnings growth (PEG) ratios suggest that multiple expansions coincide with increasing fundamental growth expectations.

Finally, Citibank's key sentiment indicator, the Levkovich Index, has entered a state of Euphoria. Equity mutual funds and ETFs saw stable outflows in 2022 and 2023, indicating a risk-averse position among investors. However, in 2024, particularly in the latter part of the year, there was a significant positive shift in equity fund flows, especially in ETFs.