U.S. equity leadership is expected to broaden heading into 2026, with investors facing periodic volatility as market participation extends beyond a narrow group of mega-cap stocks.
BNN Bloomberg spoke with Scott Chronert, U.S. equity strategist at Citi, about small- and mid-cap opportunities, the evolution of artificial intelligence investment themes and how productivity gains could support earnings over time.
Key Takeaways
- Citi expects U.S. equity leadership to broaden in 2026, with participation extending beyond mega-cap growth stocks.
- Small- and mid-cap stocks are seen as increasingly attractive due to lower valuations and improving earnings growth expectations.
- AI investment tailwinds are expected to persist, though leadership within the theme is likely to become more dispersed.
- A growing number of companies are expected to adopt AI to improve productivity, margins and earnings stability over time.
- Investors should prepare for ongoing volatility as leadership broadens and markets adjust to shifting growth drivers.
Read the full transcript below:
ANDREW: According to Citi, broadening is a key theme for markets in 2026, though investors can expect ongoing bouts of volatility. Let’s get more from Scott Chronert, U.S. equity strategist at Citi. Scott, great to see you. Thanks very much for joining us.
SCOTT: Good morning, Andrew. Good to be here.
ANDREW: Now, over the past year, as you know, the Russell 2000 small-cap index has overtaken the S&P 500 over five years. It’s still a long way behind. But will that be one of the themes we see — small caps doing well against the big blue chips?
SCOTT: Well, we think so. You mentioned earlier our view toward broadening as we go into 2026. The way we’ve been describing it is that there are a couple of ways you can play this broadening theme. One is by moving away from the mega-cap growth tech part of the S&P 500 into other large-cap sectors. Another way to do it is by moving down the cap spectrum into U.S. small- and mid-cap.
We’ve been advocating an incremental allocation to the small-cap space over the past several months. What I would say it’s premised on, quite simply, is a much more attractive valuation starting point than you have in large caps. Part of that is because there is less mega-cap growth tech influence. The other part is that, if you look at consensus expectations, this year should trigger an acceleration in earnings growth for this part of the market, which has been underwhelming over the past two to three years.
So a better valuation starting point and an improved growth outlook, to us, bring the small-cap trade back into focus.
ANDREW: What do you think will be the theme for AI investors this year? There was enormous excitement last year. We saw power stocks shooting up — maybe you could put up Constellation Energy, CEG — without addressing specific stocks here. Will those themes, for example enthusiasm over electricity buildout, repeat themselves?
SCOTT: I think you’re right. There are going to be several themes that relate to the AI playbook. First, we would say it’s very hard for the S&P 500 to move materially higher without what we’re now referring to as the Elite Eight contributing and participating in that performance. You need the ongoing spending tailwinds on capex and related AI infrastructure to continue.
Another element is that, within this mega-cap growth, AI-effective part of the market, we continue to look for higher dispersion among the stocks themselves. We saw this last year and we think it continues this year.
The third element is that, for all the focus on what we refer to as the AI enablers — those companies that are part of the infrastructure buildout and are positioned to provide AI-related computing capacity — we also expect a shift down the AI adopter path this year. More companies will be talking about their own AI initiatives and how, over time, that should begin to enhance productivity and support underlying fundamentals.
ANDREW: That’s interesting. We’ve seen enormous enthusiasm for the enablers — the hyperscalers that provide this massive computing power, including Alphabet and Amazon. But do you see some industries actually profiting from AI and attracting investor attention?
SCOTT: Yeah. When we talk about a structural bull case for the S&P 500 — moving away from the small-cap discussion to large caps — the bull case, in our view, is largely around the persistence of improving productivity.
What you typically get with improving productivity is better margin performance, better profitability, or perhaps more stable earnings because companies are managing cost structures more effectively. The way we’re talking about this going into this year, and different from the last two years, is that most companies, particularly within the S&P 500, need to have an AI initiative.
If they don’t, investors are asking management why. And if management doesn’t have one, it puts them at risk versus competitors that do have AI-driven productivity enhancements. The bottom line is we think corporate America will continue pushing in this direction, incorporating AI techniques and capabilities into business models.
It’s going to be very hard to measure on a one-off, company-by-company basis, but in aggregate, we think it will remain a major focus over the next couple of years. Ultimately, it should support more sustainable earnings drivers or better productivity measures.
ANDREW: And of course, as investors, everybody’s impatient, but new technologies typically take quite a while to actually show up in corporate profitability, right?
SCOTT: Exactly. That’s what we have to allow for. We’re saying, look over the next couple of years. Companies will be talking about this in real time now, but the actual ability to measure the benefits is going to take time.
We’re going to want specific measures — better margin profiles or other productivity metrics — but this is certainly part of the longer-term AI playbook. There is an offset, though. What does it mean for labour conditions if companies can do more with fewer employees? That creates a push-pull dynamic between the benefits of AI and the longer-term consequences for the U.S. labour force, and potentially more broadly.
ANDREW: We’ll leave it there. Scott, thank you very much. Scott Chronert, U.S. equity strategist at Citi.
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This BNN Bloomberg summary and transcript of the Jan. 23, 2026 interview with Scott Chronert are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
