Citigroup (C, Financial) has predicted the S&P 500 will reach the 6,500 milestone by year-end 2025 due to steady earnings growth and sectoral diversification. However, the projection advocates mid-single-digit returns based on 13 percent earnings growth, which is slightly below the consensus of 14 percent.
Citi modeled its bull case target at 6,900 and its bear case floor at 5,100. The firm expects significant volatility vs the more stable performance seen in 2024 while noting that valuations remain high, skewing risk to the downside.
Citi's forecast relies on the 'no cycle' economic theory, absent the traditional late-cycle dynamics, as a result of Federal Reserve policies. Strategists led by Scott T. Chronert say such growth will be driven by further advancement of AI and possible productivity gains. But they say today's valuations imply markets already include expected enhanced returns.
Grasping the earnings should be influenced by policy uncertainties, among them former President Trump's possible return. Citi says deregulatory and tax reforms can provide long-term economic benefits, although tariffs may dampen short-term results.
Citi suggests that during pullbacks, investors engage in tactical investment in underperforming sectors, mid- and small-cap stocks. Mega-cap stocks such as the "Magnificent Seven" are relied on, and participation is deemed critical to broader market participation.
Citi warns investors to be cautious as the bull market approaches its third year. Growth potential is pitted against the risks of stretched valuations and policy shifts.
