Citi analysts continue to classify U.S. equities as being in a bull market, but they warn that the character of this rally has changed. Rather than a steady climb, Citi expects a "more volatile bull" - a pattern that is evident beneath a relatively stable headline S&P 500.
The investment bank notes the S&P 500 has largely traded in a range between 6800 and 7000. That apparent stability in the index masks sharp swings at the stock and sector levels as market participants grapple with the implications of artificial intelligence on business models and valuations.
Citi says investor focus has shifted away from near-term earnings strength toward longer-term valuation risk tied to AI-related disruption. Strategists describe these concerns as "terminal" multiple issues, reflecting doubts about how sustainable earnings and growth will be in an environment where AI changes competitive dynamics.
The bank emphasizes that the immediate outlook for corporate profits has not collapsed - earnings remain solid. The central risk, according to Citi, lies in uncertainty about future margins. If productivity improvements tied to AI trigger more intense price competition or demand large upfront spending, companies may find it difficult to expand margins over time, which could constrain the argument for higher valuations over multiple cycles.
So far, the market-level response has been selective rather than universal. Measures of single-stock volatility have risen more quickly than index-level volatility, and stock correlations are at levels not commonly seen in recent decades - Citi points to correlations being near two-decade lows. That environment has supported rolling sector corrections that often offset one another, allowing the headline index to remain relatively steady despite weaker sentiment in certain pockets.
According to the strategists, what is unfolding is case-by-case repositioning rather than broad-based de-risking. Investors are scrutinizing specific industries to assess exposure to AI competition. Citi highlights software, insurers, financial services and transportation as areas under particular examination as market participants debate which business models are most vulnerable.
For the broader market to embark on a more sustained advance, Citi says investors will likely need clearer evidence of a soft economic landing - characterized by lower inflation and interest rates - or convincing demonstrations from companies that their competitive advantages will endure in an AI-affected landscape. Absent such clarity, Citi expects elevated stock-specific volatility to persist even as the headline index appears steady.
Implication - The ongoing dynamic points to a market where headline calm coexists with active repositioning beneath the surface, with AI-related valuation concerns driving much of the reassessment across select sectors.