The market’s brutal Friday selloff was a sharp departure from its recent gains. However, with earnings remaining strong, one firm sees a clear path higher.
Stocks ended lower on Friday, with the S&P 500 falling some 2.5%, its biggest one-day percentage decline since October, according to Dow Jones Market Data. That put the index in the red for the week, snapping a nine-week winning streak and marking the largest one-week percentage decline in just over a year.
The Nasdaq also had its worst day in more than a year on Friday, and artificial intelligence fears—fueled by big spending plans and Broadcom’s earlier earnings—were the main culprit behind stocks’ decline.
Yet stocks were already on the rebound to start the week, and Citi’s Scott Chronert thinks investors have the right idea. After the bell Friday, he raised his year-end S&P 500 base-case target to 8100 from 7700 to reflect his expectations for higher earnings.
Chronert now expects S&P 500 earnings per share to come in at $350 for 2026 as a whole, up from $320 at the start of the year, and introduced a preliminary estimate of $400 for next year. He cites ongoing AI tailwinds that are being felt across sectors and has “high confidence in continued earnings beats” at least through the end of 2026.
“Earnings growth, not multiple expansion, is the likely index driver going forward,” he continues. “While macro conditions certainly matter, the fact is that the breadth of the AI-related ecosystem is broadening beyond just tech. So, while ongoing concerns regarding the Iran conflict, oil/energy prices, inflation, and interest rates are all potential volatility drivers, it is underlying fundamental trajectories associated with AI spend that remains the focus for now…. Other sectors matter, just not to the same degree.”
Or to put it more simply, big tech companies are the biggest part of the market, and their ongoing strength means that investors don’t have to worry as much about other risk factors from inflation to international affairs. The surprisingly strong first-quarter earnings season helps support that view, and similar momentum could continue in coming quarters, even if growth moderates from recent levels.
Of course, investors can’t assume AI-driven spending will continue indefinitely. Nonetheless, Chronert doesn’t think that it will slow down this year or next. He believes that investors “need to acknowledge some degree of deceleration (if not decline) in spending will eventually set up for an equity market hangover effect. But that is not currently in the line of sight. Between here and there, the focus will eventually turn to the ability of corporate America to prove out the productivity promise which is associated with AI.”
Even if AI spending eventually slows, broader adoption of the technology could provide a new source of support for corporate earnings and the market.
The road to that future is likely to be bumpy. As Friday’s selloff shows, the market’s euphoria about AI doesn’t make it immune to moments of doubt, and sharp pullbacks are likely to remain part of the ride.
However, with strong earnings providing fundamental support, those swoons are likely to be the exception rather than the norm. For now, investors have something more tangible than AI hype to lean on: profit growth.
Write to Teresa Rivas at teresa.rivas@barrons.com
