S&P 500 stumbles in 2026 as small-caps and defense stocks outshine mega-caps
The S&P 500 has faced a rocky start to 2026, dropping around 6.7% so far. Currently trading near 6,417, the index remains below Citi's year-end target of 7,700. Analysts at the bank still expect a rebound, but risks like rising Iran tensions could disrupt progress. Citi's baseline forecast for the S&P 500 stands firm at 7,700 by the end of 2026. To reach this level, the index would need to climb roughly 20% from its current position. The projection assumes earnings per share of $320 for the year, with the Information Technology sector leading gains—its 2026 estimates have risen by over 11%.
While large-cap stocks have struggled, smaller companies have shown resilience. Small-cap and mid-cap benchmarks have advanced by more than 3% and 4% respectively in 2026. Defense firms, in particular, have surged due to rising military budgets and geopolitical tensions. Rheinmetall's stock soared from under 83 EUR in early 2022 to over 2,000 EUR by October 2025, a more than 20-fold increase. Hensoldt also jumped from 11.60 EUR to over 117 EUR in the same period. Meanwhile, BioNTech, a smaller biotech firm, saw its share price dip from 91.88 EUR in March 2024 to 88.78 EUR by March 2026, weighed down by weak COVID-related revenue and lowered forecasts. Citi's strategy team highlights escalating Iran tensions as the most immediate threat to market stability. On a brighter note, the bank anticipates three quarter-point interest rate cuts by the Federal Reserve before year-end. This could provide support for equities, though the Elite 8 mega-cap companies—while still dominant—are no longer the sole drivers of earnings adjustments within the index.
Citi's 7,700 target for the S&P 500 relies on stronger earnings and potential rate cuts. Smaller-cap stocks, particularly in defense, have outperformed mega-caps, reflecting shifting investor priorities. However, geopolitical risks and uneven sector performance may shape the market's trajectory in the coming months.
