Citi midyear outlook: 2.5% global growth, S&P 500 to 8,100 on AI spending

Citi Research's midyear 2026 outlook, released as the second half of the year begins, centers on a global economy continuing to expand despite geopolitical uncertainty, moderating inflation, and ongoing supply-side pressures. The bank's base case remains one of continued expansion rather than recession, though growth expectations have softened across major economies.

Global growth is forecast at 2.5% in 2026. The United States is projected to expand at 2.1% in 2026, easing to 1.8% in 2027, while China is forecast to grow at 4.7%. The Euro Area faces the weakest outlook, with growth of only 0.3% in 2026, but is expected to improve to 1.4% in 2027. Emerging market growth is projected at approximately 4.0% in 2026, down from 4.3% the prior year. U.S. unemployment is expected to average 4.5% in 2026, and headline inflation is forecast to decline from 3.2% in 2026 to 1.7% in 2027.

Monetary policy is undergoing a significant shift. The Federal Reserve's next move is expected to be a rate cut rather than a rate hike, with the Fed Funds rate projected to end 2026 at 3.25% and move to 3.00% during 2027. Citi's U.S. Equity Strategy team recently increased its year-end 2026 S&P 500 target to 8,100, supported by earnings forecasts of $350 per share in 2026 and $400 in 2027. The AI investment cycle remains an important structural driver of earnings growth and capital spending, though Citi is seeing increasing evidence of broader participation beyond initial AI beneficiaries as economic data improves and earnings upgrades widen. Citi's global strategists target approximately 6% upside for global equities by year-end 2026.

Fixed income markets are increasingly focused on policy rates as drivers of returns. Citi forecasts the U.S. 10-year Treasury yield at 3.90% by year-end 2026, with German 10-year Bund yields at 3.00% and U.K. 10-year Gilt yields at 4.85%. The Treasury yield curve is expected to steepen modestly as monetary policy eases. In credit markets, U.S. Investment Grade spreads are targeted at 90 basis points and U.S. High Yield spreads at 305 basis points, with the U.S. High Yield default rate forecast at 3.4% in 2026. Spreads remain relatively tight by historical standards, leaving base rates as a larger contributor to total yield than spread income.

Commodity markets reflect a combination of geopolitical developments and longer-term structural demand drivers. Following an interim U.S.-Iran agreement that eased tensions, crude oil prices retreated from recent highs, but hostilities have flared up again and Strait of Hormuz flows face renewed disruption risk. Citi's base case assumes a return to negotiations within 1–2 weeks, though delays have become more likely. The firm forecasts Brent crude averaging $75/bbl in Q3 2026, $70/bbl in Q4 2026, and $65/bbl in 2027, assuming a deal materializes and the Strait reopens. WTI is forecast at $71/bbl in Q3 2026, moving lower during 2027. Gold remains supported by demand for diversification and macroeconomic hedges, though Citi is waiting to turn bullish until the end of summer; the firm sees gold reaching $5,000 in 2027. Copper, linked to electrification and digital infrastructure development, is forecast at $14,000/MT in Q3 2026, $14,500/MT in Q4 2026, and $14,250/MT average during 2027.

On foreign exchange, Citi expects gradual U.S. dollar weakness over the medium term. The DXY is forecast to decline from 101.82 in Q3 2026 to 99.96 by Q3 2027. EUR/USD is expected near 1.14, USD/JPY to decline from 159 to 144 by year-end 2027, and GBP/USD to remain around 1.31. USD/CNY is forecast to move toward 6.73. Emerging-market performance remains highly differentiated, with investors balancing growth opportunities against macroeconomic and policy risks. Citi's economists continue to monitor the potential impact of a severe El Niño event on food prices, energy generation, and labor productivity across emerging markets. Emerging-market local-currency bonds continue to outperform U.S. Treasuries on a year-to-date total-return basis, with Latin America leading performance and CEEMEA also delivering solid returns.

On digital assets, Citi's team notes that total crypto market capitalization is around $2.35 trillion（約380兆円）, though Bitcoin ETF flows have disappointed as investor risk-appetite and congressional progress remain scarce. Stablecoin usage continues to expand, and blockchain ecosystems continue to compete for activity and liquidity. The firm highlights the importance of monitoring quantum computing, which could influence the long-term evolution of blockchain networks.

Overall, Citi's defining theme for the remainder of 2026 remains resilience. Global growth is expected to remain positive, inflation continues to moderate, and the AI investment cycle remains an important driver of earnings and capital spending. However, investors continue to navigate geopolitical uncertainty, evolving monetary policy, supply-chain risks, climate-related disruptions, and technological change.

Citi's midyear outlook reflects a view of the global economy continuing to expand despite persistent headwinds. While growth expectations have softened—global growth of 2.5% is more modest than prior periods, and the U.S. is forecast to decelerate from 2.1% in 2026 to 1.8% in 2027—the bank's base case explicitly rules out recession. The AI investment cycle remains a defining structural driver of corporate spending and earnings, but Citi notes increasing evidence that market leadership is broadening beyond the initial AI beneficiaries, with improving economic data and earnings upgrades supporting a wider range of opportunities across global equities and regions.

Monetary policy is undergoing a meaningful inflection: after an extended period of elevated rates, the Federal Reserve is expected to cut, with the Fed Funds rate declining to 3.25% by year-end 2026 and further to 3.00% in 2027. This easing backdrop, combined with moderating inflation (U.S. headline inflation forecast to fall from 3.2% in 2026 to 1.7% in 2027), is expected to steepen the Treasury yield curve modestly and support financial conditions more broadly. Credit markets remain supported by relatively stable fundamentals, though spreads are tight by historical standards, making central bank policy and duration positioning increasingly important for returns.

Geopolitical risks and climate-related disruptions remain significant wildcards. Citi explicitly monitors the potential impact of a severe El Niño event on food prices, energy generation, and labor productivity, particularly in emerging markets. Near-term energy-market volatility—driven by U.S.-Iran tensions and potential Strait of Hormuz disruptions—creates near-term uncertainty, though Citi's base case assumes negotiations within 1–2 weeks and a return to lower oil prices (Brent toward $65/bbl in 2027) as flows normalize.

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