Citi continues to advise investors to split equity exposure between growth and cyclical stocks, maintaining a barbell orientation as the U.S. bull market enters what the firm describes as a more volatile phase. In a note on Thursday, analyst Drew Pettit reiterated that the firm is focused on "barbelling risk between Growth and Cyclicals."
The bank outlines a clear rationale for its twin preference. On the growth side, Citi still favors large-cap growth stocks for three specific reasons: they can serve as a defensive allocation in the face of short-term macro weakness, earnings revisions for these names are still moving higher, and they provide liquidity that can be useful within broader portfolios.
On the cyclical side, Citi recommends moving down the market-cap spectrum rather than staying concentrated in large caps. Pettit singled out small-cap value as the preferred cyclical exposure, arguing that this segment is poised to deliver the strongest earnings growth inflection and that this prospective improvement appears not to be fully priced into current valuations. The bank flagged the S&P 600 Value index as its preferred cyclical tilt.
Supporting Citi's positioning is the bank's bullish 2026 earnings projection for the S&P 500. Citi put its 2026 S&P 500 earnings estimate at $320, which the firm noted sits near the high end of consensus. Pettit also highlighted that the underlying earnings support is broadening, citing an expected sharp reduction in the number of S&P 500 constituents forecast to have negative earnings growth in 2026.
Further reinforcing the barbell case, Citi pointed to an inflection in small- and mid-cap earnings that emerged during third-quarter results. The bank said this inflection helped end what it described as a multi-year earnings growth recession for those cohorts, offering additional justification for balancing portfolios between large-cap growth and smaller-cap cyclicals.
Analysis summary
Citi's stance is pragmatic: retain large-cap growth as a defensive, liquid sleeve while increasing exposure to smaller-cap value where earnings momentum and valuation opportunity appear more compelling. The bank's $320 S&P 500 earnings projection and the anticipated drop in firms with negative earnings growth underpin this barbell recommendation.
Key points
- Citi endorses a barbell between large-cap growth and small-cap cyclicals, prioritizing liquidity and earnings momentum in growth names and earnings inflection plus valuation in small-cap value.
- The bank projects S&P 500 earnings of $320 for 2026 and says earnings support is broadening, with fewer companies expected to report negative earnings growth.
- Citi identifies the S&P 600 Value index as its favored cyclical exposure, citing an earnings recovery in small- and mid-cap segments that ended a multi-year earnings growth recession.
Risks and uncertainties
- Macro volatility - The near-term macro environment could undermine the defensive role of large-cap growth if short-term weakness is more pronounced than anticipated, affecting the liquidity and protective characteristics of these names.
- Valuation timing - The anticipated earnings inflection for small-cap value may not be fully reflected in pricing, creating timing risk if earnings improvements are slower or weaker than expected.
- Earnings dispersion - While Citi expects a broadening of earnings support, the degree to which the number of S&P 500 firms showing negative earnings growth declines is a forecast and subject to change with company-level results.