After a tumultuous first half of 2025, US equities mounted a robust recovery from their lows in April, emerging from a quick bear market triggered by President Trump’s unpredictable tariffs and trade policies. This uncertainty resulted in significant losses, with the S&P 500 dropping almost 21% and the Nasdaq Composite sinking over 26%. However, the subsequent rebound has been impressive, with the S&P 500 surging around 32% and the Nasdaq soaring by nearly 45% to achieve new all-time highs.
Despite this recovery, scepticism persists among analysts and investors. Many are troubled by high valuations, with the S&P 500 trading at approximately 20.5 times forward 12-month earnings—significantly above the 10-year average of around 17.5 times. Additional concerns about US trade policy, sluggish growth in China, and signs of a slowdown in the US economy contribute to the anxiety surrounding the market.
In the face of this uncertainty, major brokerage firm Citi has reaffirmed its bullish outlook, increasing its year-end target for the S&P 500. In their recent strategy report titled "US Equity Strategy, Better Earnings Trigger Target Reset," they have raised their base-case target for 2025 to 6,600 (up from 6,300), alongside earnings estimates of $272 for 2025 and $308 for 2026.
Citi’s Updated Targets:
- Base-case target: 6,600
- Bull-case target: 7,200
- Bear-case target: 5,600
Citi’s strategists noted a robust earnings season, with second-quarter results outperforming expectations and no significant downward adjustments to future guidance, thus allowing for upward revisions to overall earnings forecasts.
Key Factors Boosting Earnings Outlook:
- Strong Q2 Earnings Season: Positive earnings and sales surprises significantly exceeded the historical average.
- Stable Guidance: No major cuts to corporate guidance have been noted, allowing for consensus earnings projections to rise.
- Tariff Impact Stabilisation: Companies heavily reliant on imports are managing costs effectively, mitigating tariff impacts.
- Tax Reform Impacts: Recent tax reforms are expected to provide additional earnings per share (EPS) upside.
- Broadening Earnings Participation: Although major tech firms remain the leaders, signs of recovery in other sectors are emerging.
Despite the positive outlook, Citi warns that the market may face increased volatility moving into 2026, as indicated by its proprietary Levkovich Index, which measures market sentiment. Currently, it sits in a "Euphoric" state often linked to high volatility, signalling potential sharp downturns in a rallying market.
Final Insights:
While risk-averse investors may feel anxious about fluctuating markets, those willing to embrace volatility could find opportunities. The current environment may yield further gains, albeit alongside more pronounced market fluctuations. Citi argues that fundamentals, particularly resilient earnings growth, will be key to sustaining the bull market.
In conclusion, while uncertainties loom, the prospects for US equities remain promising, bolstered by stronger-than-expected earnings growth and positive market sentiment. As Citi aptly states, understanding the dynamics of rising earnings will help steer clearer paths for investors looking beyond short-term market volatility.
