Citi Strategist: No Fear of Software and Semiconductor Stocks for 2026

Market Reaction to Geopolitical Events

• 📈 The market showed resilience, with the Dow reaching record highs despite geopolitical events, indicating low implied volatility across assets like oil and the dollar.
• 💡 This suggests that geopolitical shocks are not fundamentally altering the positive outlook for equities, especially if macroeconomic conditions remain stable.

The "Run It Hot" Thesis and Economic Outlook

• 🚀 The persistent theme is the "run it hot" thesis, anticipating economic acceleration and broadening growth in 2026.
• 📉 Weaker-than-expected ISM surveys led to a rally in Treasury yields, fueled by expectations of further Federal Reserve stimulus.
• ⚠️ Financing the AI infrastructure buildout could potentially lead to supply problems in the Treasury market, reminiscent of 2018.

Investment Themes for 2026

• 💡 Inflecting Growth is a key theme, particularly for companies that have experienced stagnant earnings and could benefit from an equity soft landing and Fed rate cuts.
• 💰 Financials are highlighted as a sector that plays well into this theme of inflecting growth.
• 💻 Technology stocks, including software and semiconductors, are recommended due to their high returns on capital expenditures.
• 🎯 Investors are advised to consider both cyclical and growth beta themes for 2026, with a focus on companies demonstrating strong growth and high returns.