Citigroup's 2026 Market Outlook: The Great Broadening – Unlocking Opportunities in Undervalued Sectors

As 2026 approaches, Citigroup's latest market outlook, dubbed the "Great Broadening," paints a compelling picture of a global equity market poised for a more inclusive rally. According to a report by Citi Research, the firm anticipates a "Goldilocks" environment characterized by resilient global economic growth (2.7% in 2026 and 2.8% in 2027) and stable inflation, creating favorable conditions for cyclical and value sectors to outperform. This analysis delves into the undervalued sectors and themes highlighted by Citigroup, offering a roadmap for investors seeking to capitalize on the anticipated diversification of returns.

Cyclical and Value Sectors: The New Frontline

Citigroup's 2026 outlook emphasizes a strategic shift toward cyclical and value-oriented investments, driven by accommodative monetary policies and a soft landing narrative. With central banks, including the Federal Reserve, expected to implement rate cuts, liquidity settings will support stronger nominal GDP growth and buoy cyclical financial assets tied to natural resources. Sectors such as industrials, materials, and energy-historically sensitive to economic expansion-are positioned to benefit from this environment.

For instance, base metals, which have lagged in recent years, are highlighted as a key area of opportunity. Citi Research notes that global EPS growth is projected to accelerate to 11% in 2026, with all major regions contributing, signaling a departure from the 2025 concentration of gains in the U.S. and emerging markets. This broadening of earnings growth underscores the potential for undervalued cyclical sectors to outperform as global demand stabilizes.

Small/Mid-Cap Stocks: The Overlooked Powerhouse

While the U.S. market continues to deliver robust earnings growth, particularly in small/mid-cap (SMID) segments, Citigroup's report underscores the untapped potential of SMID-cap stocks outside the U.S. These equities, often undervalued relative to their large-cap counterparts, are expected to lead in 2026 as global liquidity remains accommodative.

Emerging markets and continental Europe are identified as key beneficiaries. For example, European financials-priced for pessimism amid regulatory reforms and improving credit conditions-could see a re-rating. Similarly, emerging market SMID-caps, which have historically traded at discounts to developed market peers, offer compelling risk-adjusted returns as global investors rebalance portfolios according to the analysis.

China's AI Value Chain: A Strategic Bet

Citigroup's 2026 outlook also singles out China's AI value chain as an undervalued sector with long-term growth potential. Despite near-term challenges, including regulatory scrutiny and global supply chain shifts, the firm argues that China's investments in AI infrastructure, semiconductors, and data centers position it to capture a significant share of the global AI boom.

This thesis aligns with broader trends in technology-driven economic transformation. As AI adoption accelerates across industries, companies involved in cloud computing, edge computing, and AI-driven analytics-particularly in China-are likely to see earnings growth outpace broader markets.

Financials and Base Metals: Anchors of Resilience

Citi Research's emphasis on financials and base metals reflects a focus on sectors that thrive in low-inflation, growth-positive environments. Financials, particularly in regions with underpenetrated markets, stand to benefit from rising interest rates and improved credit quality. Meanwhile, base metals-such as copper and aluminum-are expected to see demand surges driven by green energy transitions and infrastructure spending according to market analysis.

However, investors must remain cautious. The report warns that stretched valuations in certain sectors could pose risks if earnings per share (EPS) fail to meet expectations. A diversified approach, balancing exposure to cyclical sectors with defensive holdings, is recommended to mitigate volatility.

Conclusion: Navigating the Great Broadening

Citigroup's 2026 outlook presents a compelling case for a more balanced market landscape, where undervalued sectors and geographies gain traction. By overweighting cyclical and value equities, SMID-cap stocks outside the U.S., and China's AI value chain, investors can position themselves to capitalize on the anticipated broadening of returns. While risks such as valuation extremes and macroeconomic shocks persist, the "Goldilocks" environment outlined by Citi Research suggests that global equities remain a core asset class for 2026.

As always, due diligence and strategic rebalancing will be critical. The Great Broadening is not just a macroeconomic narrative-it is an invitation to rethink portfolio construction in a world where diversification is no longer optional.