As long as market fundamentals stay in tact 2026 should be good year, says Citi's Drew Pettit

Brian Sullivan (Anchor) 00:00.000

These are not the only companies that outperform some big cap tech, but they did catch our collective eye, but that was this year. Let's turn now to next year and see what might be on the radar and welcome back in Citigroup Director of Research for U.S. Equity Strategy. Drew

Brian Sullivan (Anchor) 00:16.320

Petta Drew, welcome. Happy New Year. Uh, I was just a tiny slice of what was a third year of another good run. Do you see a record rally continuing into its fourth year?

Drew Pettit (Director of U.S. Equity Strategy) 00:28.720

We do and Brian it's all fundamentals. Like, look, I I heard the technical set up at the beginning of the show. I I hear people talk about sentiment, but when you get down to the nitty-gritty, earnings are still moving higher. We're above consensus. We're probably at the high

Drew Pettit (Director of U.S. Equity Strategy) 00:43.480

end of the street. As long as the fundamental story is still intact, we're happy to stay invested in this market and buy some risk and hold some risk into 2026.

Brian Sullivan (Anchor) 00:54.040

I want to be optimistic. It's New Year's Eve. Everybody wants to feel good when that ball behind me here at the Nasdaq drops at a few few hours, but I wouldn't be doing my job if I didn't ask what would be the risk to the fundamental strength story.

Drew Pettit (Director of U.S. Equity Strategy) 01:09.080

Look, it's the multiple and I hate to come back to something that sounds very basic and down the middle, but we're paying a lot for a really good fundamental story. When we really break this down, we think the market is discounting about 10% earnings growth for the next 5 years.

Drew Pettit (Director of U.S. Equity Strategy) 01:25.400

That is extremely good. What we have in our projections implicitly is about about 12% growth. The problem is if you get good growth, not great growth, that's a reason for people to take profits. So the risk to us, everyone says valuation, but to us it's really growth living up

Drew Pettit (Director of U.S. Equity Strategy) 01:43.800

to those valuation expectations.

Brian Sullivan (Anchor) 01:46.240

All right. Inside the market, you know there's 11 different sectors. One of them is called industrials. The industrial sector currently the third best performing S&P 500 sector this year. Now normally I wouldn't reference a third best of anything, Drew, but That was the first

Brian Sullivan (Anchor) 02:01.200

time it is finished in the top three in 12 year I mean 12 years for these industrial companies. We've talked a lot about this potential shift in the market. What's your internal thesis for sectors and stocks next year?

Drew Pettit (Director of U.S. Equity Strategy) 02:19.320

Yeah, it's funny. There There's a couple stories here. One, it's inflecting growth. So we've heard people talk about earnings are broadening, growth is broadening, market performance is going to broaden. But to us, there's companies that have had negative growth for three plus

Drew Pettit (Director of U.S. Equity Strategy) 02:34.880

years coming out of that post-pandemic high that we're finally going to see some inflections. That plays really well to some cyclicals. Industrial falls in there, we like financials a little bit better. Another thesis, growth, that game's not over. Look, there's still a lot of

Drew Pettit (Director of U.S. Equity Strategy) 02:50.640

AI stocks that when you discount the earnings are actually reasonably priced. So to us, there's still AI at a reasonable price out there. And then the last past piece, look, there's a lot of companies that have really changed and improved operations. There's tons of these big

Drew Pettit (Director of U.S. Equity Strategy) 03:07.600

cap names that survived a pandemic. They've survived terrorists. They've survived a lot of business challenges. There's a ton that are improving ROE from an operational perspective. Those three stories, those three stock stories are the biggest ones we think that will really

Drew Pettit (Director of U.S. Equity Strategy) 03:22.720

define the internals of the market in 2026.

Brian Sullivan (Anchor) 03:25.880

Any sectors out there that you don't like that you're just sort of negative or or the minimum neutral, Andrew?

Drew Pettit (Director of U.S. Equity Strategy) 03:32.560

It's it's consumer to be honest with you. Again, another segment I heard like right before, you know, Power Lunch. There's winners and losers in consumer. When you're kind of in that world, it's hard to have a really good fundamental view. You know, we're ahead of earnings on

Drew Pettit (Director of U.S. Equity Strategy) 03:47.360

pretty much every sector, except consumer discretionary and consumer staples. I don't think there's a really great catalyst there for outperformance of those two sectors.

Brian Sullivan (Anchor) 03:57.280

Yeah, and then you got an international view. I know your U the US guy, we'll talk international in the next segment actually, Drew. But listen, the the world has done better than us this year is is next year we're going to go back to sort of eagle on the shoulder, Apple pie,

Brian Sullivan (Anchor) 04:09.120

USA, or what?

Drew Pettit (Director of U.S. Equity Strategy) 04:11.520

It's idiosyncratic. I I I really think like AI, for example, yeah, it's much more dominant in the US market. I would say it's at least 50% of US market cap, at least up cap anyways. But when you think internationally, it's not as big of a piece of that pie, but the AI had a

Drew Pettit (Director of U.S. Equity Strategy) 04:28.840

reasonable price names. are much easier to find internationally and those off of the tariff lows have actually outperformed the US AI to reasonable price names. So there's some opportunities there. I think you want to kind of piece these themes together, not just domestically

Drew Pettit (Director of U.S. Equity Strategy) 04:43.240

but globally as well.