Midyear 2026 Outlook: Resilience, AI, and Evolving Market Dynamics

As the second half of 2026 begins, Citi Research's outlook remains centered on a global economy that continues to expand despite geopolitical uncertainty, moderating inflation, and ongoing supply-side pressures. While growth expectations have softened, our base case remains one of continued expansion rather than recession. At the same time, the AI investment cycle continues to influence corporate spending, earnings expectations, and broader market performance.

Global Economy: Slower Growth, Continued Expansion

While the global outlook remains constructive, we continue to monitor several key risks, including higher energy costs, supply-chain disruptions, and the growing possibility of a significant El Niño event. These factors could affect inflation, agricultural production, energy generation, and labor productivity across a number of regions.

Key forecasts include:

• Global growth of 2.5% in 2026. 
• U.S. real GDP growth of 2.1% in 2026, easing to 1.8% in 2027. 
• China GDP growth of 4.7% in 2026. 
• Euro Area GDP growth of 0.3% in 2026, improving to 1.4% in 2027. 
• Emerging market growth of approximately 4.0% in 2026, down from 4.3% last year. 
• U.S. headline inflation declining from 3.2% in 2026 to 1.7% in 2027. 
• U.S. unemployment averaging 4.5% in 2026. 

U.S. Monetary Policy

We continue to expect that the Federal Reserve's next move will 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. 

Equities: Broadening Market Leadership

Equity markets remain supported by resilient earnings growth, with leadership becoming more diversified across regions and market segments as economic data and earnings revisions improve. Our 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. 

While the AI investment cycle remains an important structural driver of earnings growth and capital spending, we are seeing increasing evidence of broader participation beyond the initial AI beneficiaries. Improving economic data, more widespread earnings upgrades, and a more constructive backdrop for cyclical areas of the market support a wider range of opportunities across global equities. Citi's global strategists remain constructive on the asset class overall, targeting approximately 6% upside for global equities by year-end 2026.

Rates: Focus Shifts Back to Policy Rates

Across fixed income markets, policy rates are increasingly important drivers of returns.

Our forecasts include:

• U.S. 10-year Treasury yields at 3.90% by year-end 2026
• German 10-year Bund yields at 3.00%
• U.K. 10-year Gilt yields at 4.85%
   

The U.S. Treasury yield curve is expected to steepen modestly as monetary policy eases.

Credit Markets: Tight Spreads Persist

Credit markets remain supported by relatively stable fundamentals and demand for income.

Our forecasts include:

• U.S. Investment Grade spread target: 90 basis points
• U.S. High Yield spread target: 305 basis points
• U.S. High Yield default rate: 3.4% in 2026
   

Spreads remain relatively tight by historical standards, leaving base rates as a larger contributor to total yield than spread income. As a result, the outlook for central bank policy and duration positioning are becoming increasingly important considerations across credit markets.

Commodities: Structural Themes Remain in Focus

Commodity markets continue to reflect a combination of geopolitical developments and longer-term structural demand drivers

Energy

Following easing tensions associated with a U.S.-Iran interim agreement, crude oil prices had retreated from recent highs, but hostilities have flared up again and Strait of Hormuz flows face renewed disruption risk. The base case remains a return to negotiations within 1–2 weeks, but delays have become more likely. We continue to forecast Brent averaging $75/bbl in Q3 2026, $70/bbl in Q4 2026 and $65/bbl in 2027, assuming a deal ultimately materializes and the Strait reopens.

Our forecasts include:

• WTI: $71/bbl in Q3 2026, moving lower during 2027
• Brent: $75/bbl in Q3 2026, declining toward $65/bbl during 2027
   

Precious Metals

Gold remains supported by ongoing demand for diversification and macroeconomic hedges, but near-term headwinds have us waiting to turn bullish until the end of the summer. We see gold reaching $5,000 in 2027.

Industrial Metals

Copper remains closely linked to themes such as electrification, power infrastructure, and digital infrastructure development.

Our forecasts include:

• $14,000/MT in Q3 2026
• $14,500/MT in Q4 2026
• $14,250/MT average during 2027
   

Foreign Exchange: Gradual Dollar Moderation

Our FX outlook points toward modest U.S. dollar weakness over the medium term.

Key forecasts include:

• DXY declining from 101.82 in Q3 2026 to 99.96 by Q3 2027
• EUR/USD near 1.14
• USD/JPY declining from 159 to 144 by year-end 2027
• GBP/USD remaining around 1.31
• USD/CNY moving toward 6.73
   

Overall, we expect currency markets to continue reflecting relative growth, inflation, and monetary policy differentials across major economies.

Emerging Markets: Differentiation Remains Key

Emerging-market performance remains highly differentiated across countries and regions, with investors balancing growth opportunities against a range of macroeconomic and policy risks. Our economists continue to monitor the potential impact of a severe El Niño event on food prices, energy generation, and labor productivity across a number of markets. 

Key themes include:

• Potential inflation pressures from weather-related supply shocks, particularly in countries with high food-price sensitivity. 
• A somewhat more hawkish policy backdrop across parts of the emerging-market universe as central banks balance inflation risks against softer growth. 
• 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. 
• Selective opportunities remain in EM credit, supported by attractive real yields, resilient fundamentals, and continued investor demand for carry.
   

Digital Assets: Market Maturity and New Risks

Our Digital Assets team continues to monitor an evolving market landscape as institutional participation increases.

Current observations include:

• Total crypto market capitalization is around $2.35 trillion
• Bitcoin ETF flows have disappointed as investor risk-appetite and congressional progress remain scarce
• Stablecoin usage continues to expand and tokenization develop
• Blockchain ecosystems continue to compete for activity and liquidity
   

Our research also highlights the importance of monitoring emerging technological developments, including quantum computing, which could influence the long-term evolution of blockchain networks and digital asset infrastructure.

Asset Allocation: The AI Cycle Remains the Dominant Force

Our Global Asset Allocation team continues to view the AI investment cycle as a defining driver of market performance, supporting earnings growth, capital expenditure, and broader risk appetite. While geopolitical developments, monetary policy uncertainty, and supply-side shocks have periodically created volatility, our overarching framework remains anchored in the view that the conditions typically associated with the end of major bull markets have yet to emerge. Expressing a view on a relatively strong business cycle favors base metals. At the same time, elevated policy uncertainty, tight credit spreads, and ongoing geopolitical risks argue for having some hedges on as well, and credit screens well as an underweight against our equity overweight, while in rates we are mostly in relative value space. 

Timeline: Key Events to Watch

Q3 2026

AI investment remains a key market driver

• AI infrastructure spending continues to support earnings expectations and capital expenditure
• S&P 500 target: 8,100
• Copper forecast: $14,000/MT
• WTI forecast: $71/bbl
   

Q3–Q4 2026

Monetary policy inflection point

• Our economists expect the next Federal Reserve move to be a rate cut rather than a hike
• Inflation is expected to continue moderating
• The Treasury yield curve is expected to steepen modestly as monetary policy eases
   

Year-End 2026

Key forecast milestones

• Fed Funds Rate: 3.25%
• S&P 500 target: 8,100
• STOXX 600 target: 640
• U.S. 10-year Treasury yield: 3.90%
• DXY forecast: 100.88
   

Early 2027

Supply-Side and Climate Developments Remain in Focus

• El Niño conditions remain a key factor for agriculture, energy markets, and labor productivity
• Commodity and supply-chain impacts remain an important watchpoint for the global outlook

Q1 2027

Our recent research indicates normalization may be less linear due to renewed U.S.-Iran conflict escalation and potential additional Strait of Hormuz disruptions, but our base case still assumes eventual negotiations and reopening of flows.

Energy Market Normalization

• Brent crude forecast to move toward $60–65/bbl as supply disruptions continue to ease

Year-End 2027

Key forecast milestones

• U.S. GDP growth: 1.8%
• U.S. inflation: 1.7%
• Fed Funds Rate: 3.00%
• Gold: $5,000/oz
• USD/JPY: 144
• China GDP growth: 4.6%
   

Bottom Line

The 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. At the same time, investors continue to navigate an environment shaped by geopolitical uncertainty, evolving monetary policy, supply-chain risks, climate-related disruptions, and technological change.