Citi's Drew Pettit: 2026 Market Outlook and Sector Strategy

Market Outlook for 2026

• 📈 Earnings growth is projected to continue moving higher, remaining above consensus and at the high end of street expectations.
• 💡 As long as the fundamental story remains intact, the strategy is to stay invested and buy risk.
• ⚠️ The primary risk identified is growth not living up to valuation expectations, with the market discounting about 10% earnings growth for the next 5 years, while projections suggest about 12% growth.

Sector and Stock Themes for 2026

• 🚀 A key theme is inflection in growth, with companies that have had negative growth for over three years showing signs of recovery, benefiting cyclicals like industrials.
• 💡 The AI theme is still considered viable, with many AI stocks being reasonably priced when discounting earnings.
• 🛠️ Companies that have improved operations and ROE from an operational perspective, surviving challenges like the pandemic and tariffs, are also a focus.

Unfavored Sectors and International View

• 📉 Consumer discretionary and consumer staples are sectors to be cautious on, as it's difficult to have a strong fundamental view and there are no clear catalysts for outperformance.
• 🌍 Internationally, AI at a reasonable price names are easier to find and have outperformed their US counterparts, offering global opportunities.
• 🧩 Investors should piece together themes globally, not just domestically, to capture opportunities.