Buy the dip! Bull market in US stocks has more to run – Citi

The chart above shows the S&P 500 trading at 6373 based on Monday’s close. This suggests Citi sees around 3.6% upside in the US stock benchmark by the end of this year, and around 8.3% by the middle of next year. That’s roughly in line with the average return of the S&P 500 of approximately 10% over the last 20 years. (FYI, the bull case represents 17.7% upside and the bear case represents 12.1% downside).

Importantly, the upgrade is primarily an earnings story. Citi hasn’t changed how it values the market — the same growth rates, cost of equity, and long-term assumptions still apply. What’s different is that the bank now expects companies to earn more over the next few years. In other words, it’s not a case of paying more for each dollar of profit, but of expecting there to be more dollars of profit to go around.

What’s boosted the earnings outlook?

Citi’s upward revisions reflect a confluence of developments since mid-year that are likely to be supportive for US corporate earnings:

Strong Q2 earnings season: Beats to misses in both earnings and sales were in the top decile of the past 20-years, with EPS surprises averaging +7.5% versus a 20-year median of +4.6%.

No major cuts to guidance: “The healthy positive earnings surprise has not been followed up by meaningful downgrades to out-quarter guidance,” Citi observed, allowing upward revisions to feed through to consensus numbers.

Tariff impact stabilisation: For companies most exposed to import costs, margin expectations appear to have bottomed as management teams have offset part of the tariff drag with cost cuts.

Policy offsets from One Big Beautiful Bill Act (OBBBA) tax reform: Lower corporate tax rate expectations – down about 50 basis points since the bill passed on July 4 – could fall another 2–4 percentage points, offering further EPS upside.

Broadening earnings base: While the “Mag 7” remains the engine of index-level growth, Citi sees early signs of a bottom in earnings for the “other 493” companies, laying the groundwork for healthier sector participation into 2026. As Citi notes, “the path higher for the S&P 500 will require the mega-cap growth leadership to hold, with continued broadening across sectors to augment the price action.”

(FYI, the Mag 7 are: Apple (AAPL), Microsoft (MSFT), Alphabet Inc. (GOOG), Amazon.com (AMZN), Nvidia (NVDA), Meta Platforms (META), and Tesla (TSLA)).

Upside, but volatile

Despite its higher targets, Citi is clear that the road ahead may be bumpy. Its proprietary Levkovich Index* – which tracks market sentiment – remains deep in “Euphoric” territory, a condition historically associated with elevated volatility.

“A euphoric Levkovich Index keeps us aware that sentiment is extended… higher LI readings have been associated with higher volatility,” the bank noted. In past cycles, VIX spikes of 10–15 points within months have been common when the index is in euphoria, underscoring the risk of sharp drawdowns even in an ongoing bull market.

Citi’s takeaway is that volatility should be expected – and, in many cases, bought into. The firm describes the current environment as “a persistent but volatile bull,” with scope for melt-up scenarios toward its 7,200 bull case, but also for shock-driven declines toward its 5,600 bear case.

Conclusion: Further gains, but strap in!

If you’re a thrill seeker that last paragraph likely excites you: Up with dips one can buy into. It’s an exciting prospect if one can anticipate the tops and bottoms of the impending bumps. However, if you like your stock market gains nice and boring, then Citi’s latest call suggests you might be in for some nervous moments over the next 12-months!

Certainly, both US and local stock markets are confronting no shortage of uncertainties: tariff risks, global growth jitters, extended valuations. Yet, as Citi’s latest projections underscore, momentum remains firmly in the bulls’ favour. Markets have always climbed a wall of worry, and Citi argues this cycle is no different.

Ultimately, stock prices track earnings, and the bank’s upgraded forecasts offer comfort that fundamentals can underpin further gains. It’s reassuring that the bank’s bullish rationale rests on several pillars, with the most important being resilient earnings growth. As Citi put it: “From tariff negotiations and Q1 earnings, to OBBBA tax reforms and now Q2 results, all support higher index level earnings growth expectations.”

Perhaps the safest of Citi’s predictions is that volatility will remain a constant companion. But for investors willing to look beyond short-term swings, Citi’s message is clear: US equities still have room to run.

*The Levkovich Index — formerly known as the Panic/Euphoria Model — was developed by Tobias Levkovich, Citi’s long-time chief US equity strategist until his passing in 2021. Citi has continued to publish and update the index as part of its equity strategy research, using it to gauge market sentiment and its implications for future returns and volatility.

This article first appeared on Market Index on Tuesday, 12 August 2025.