AI-Driven S&P 500 Rally Hinges on Rate-Sensitive Stocks
Key Summary
Citi Research expects the S&P 500 to reach 8,100, driven by AI-linked companies, but rate-sensitive sectors must close the gap. Third-quarter earnings season begins, with a rebound possible if markets price out expected Fed rate hikes and midterm elections are successfully navigated. AI spending and hyperscalers' investment returns are key drivers of the forecast.
Market Outlook
Citi Research head of U.S. equity strategy Scott Chronert says the S&P 500 needs both AI stocks and rate-sensitive sectors to rally to reach 8,100. AI-linked companies make up just over half of the index, with the other half consisting of rate-sensitive sectors. These sectors have dropped about 10% since the Federal Reserve's Jackson Hole symposium in late August. Chronert expects earnings tailwinds to continue through third-quarter reports for AI-linked companies. However, a rebound hinges on markets pricing out expected Fed rate hikes and the midterm elections.
AI-Driven Growth
Citi raised its year-end target to 8,100 from 7,700 in June, citing AI-driven earnings strength. Chronert expects earnings tailwinds to continue through third-quarter reports.
Rate-Sensitive Sectors
Rate-sensitive sectors, including utilities, real estate, consumer discretionary stocks, and banks, have dropped about 10% since the Federal Reserve's Jackson Hole symposium in late August. A rebound hinges on markets pricing out expected Fed rate hikes.
Hyperscalers' Investment Returns
Aya Yoshioka of Wealth Enhancement Group expects a positive season, with consensus pointing to upper-20s year-over-year earnings growth. She wants to see last quarter's strong cloud growth and investment returns continue. Without that, a correction could follow as investors reset expectations for 2027.
Conclusion
The S&P 500's rally is driven by AI-linked companies, but rate-sensitive sectors must close the gap. A rebound is possible if markets price out expected Fed rate hikes and the midterm elections are successfully navigated. AI spending and hyperscalers' investment returns are key drivers of the forecast.