Citi's Scott Chronert on rate cut playbook

Market Overview - The market experienced a strong week, particularly for small-cap stocks, with the Russell 2000 hitting a new record high [1] - The Federal Reserve's interest rate cut of a quarter point provided a boost to the market [1] - Earnings remain strong, suggesting a potential "Goldilocks" economy [1] Investment Strategy - Citigroup recommends a barbell strategy, favoring growth with a cyclical bias [3] - As the Fed eases further, a shift towards small and mid-cap stocks (SMID) is suggested, anticipating an earnings recovery into 2026 due to Fed stimulus [4] - Pullbacks should be aggressively bought into, expecting a strong finish to the year [8] Earnings Analysis - Earnings growth is broadening beyond AI-related companies, with evidence seen in Q2 and expected to continue in Q3 [5] - The S&P 500's capitalization is roughly split, with half attributable to AI-related companies and the other half to economic-sensitive and defensive sectors [6] - Expectations for Q3 earnings are high, requiring strong performance to meet the raised bar [8] S&P 500 Outlook - Citigroup has reached its initial year-end target of 6,600 for the S&P 500 and has a "Super Bowl case" target of 7,200 [8] - Achieving the 7,200 target requires 2026 earnings estimates to increase beyond Citigroup's current estimate of $38 per share for the S&P 500 [9] - The S&P 500's fundamental backdrop is structurally in good shape [11]