Despite rising oil prices and geopolitical risks, artificial intelligence spending plans by major technology companies remain intact with near-term investments driven by compute and memory costs rather than energy constraints. According to Citi's Drew Pettit, the $650 billion AI buildout planned by the top four US tech companies this year is expected to stay on track. However, energy demand from data centres could become a constraint if prices remain elevated for an extended period, representing a longer-term headwind for the AI infrastructure buildout. Pettit emphasized that chip pricing has been more impactful on capex efficiency than energy costs, with companies able to build more infrastructure per dollar spent, making energy constraints less immediate for the current buildout phase.
Citi maintains a year-end target of 7,700 for the S&P 500, implying further upside of 10% from current levels. As reported by CNBC TV18, Pettit noted that equities are rebounding as geopolitical stress eases, driven by repositioning rather than fundamentals. The analyst expects growth stocks to lead due to structural drivers, with markets potentially staying sensitive to macro risks even as structural technology themes continue to lead. However, he cautioned that the broadening thesis of getting earnings growth from more parts of the US market will be more difficult when fundamentals return. Pettit explained that markets are finally getting past the worst of the worst news flow around the conflict in Iran, describing it as a really aggressive repositioning move tied to secular trends rather than cyclical economy.
Software stocks have been hammered hard, with sentiment remaining poor despite recent sharp moves. According to Citi's assessment, the fundamental story for software remains challenged, with the analysts preferring semiconductors over software in the technology sector. Pettit explained that peaking quality in software names with good margins and ROEs is coming off really high levels, making it structurally challenging. The analysts are underweight software while preferring technology broadly, viewing semiconductors and AI buildout as better positioned for the current market environment. Pettit noted that on emerging markets, we kind of took that down and have a little more conviction in the US than EM for the AI trade, with Latin America feeling more insulated than Asia from oil price impacts.
Citi has upgraded the US market to overweight in recent weeks, viewing it as a way to play relative defence during geopolitical uncertainty. As reported by CNBC TV18, the firm has taken down emerging markets positioning and remains neutral on India despite earnings downgrades. The analysts believe Latin America feels more insulated than Asia from oil price impacts, even though energy costs have come down from peak levels. Chip pricing has been more impactful on capex efficiency than energy costs, with companies able to build more infrastructure per dollar spent. Pettit noted that India—look, that's a neutral for us still as earnings downgrades have been happening, with more to come, but in a relative sense, it's still not as cyclical and as concerning as other parts of Asia.
Looking ahead, earnings growth is expected to remain concentrated in tech and growth themes, similar to patterns seen in 2025. According to Pettit's analysis, revisions on the cyclical side outside of energy are concerning, particularly for industrials outside the AI complex. The analysts expect consumer-related upgrades to be more challenging, with the earnings story starting to resemble patterns from the previous year. This concentration in technology sectors reflects the continued dominance of AI-related themes in market performance, with the secular story probably making more sense in buying semis and AI buildout, not necessarily software from current levels.
