The artificial intelligence rally still has plenty of gas in the tank, at least according to Citigroup's latest forecast. The banking giant is calling for the S&P 500 to reach 7,700 by the end of 2026, driven by robust corporate earnings and continued investment in AI technology.

What's interesting here is the shift in narrative. Citi argues we're entering a new phase of the AI trade where the real winners won't necessarily be the companies building the infrastructure, but rather those actually adopting and deploying the technology. Think less about the picks-and-shovels play, more about who's using those tools effectively.

The Next Chapter of AI Investment

AI infrastructure spending will remain a central theme in 2026, but here's the catch: investors are getting pickier. As Reuters reported on Tuesday, the firm expects the market to increasingly separate winners from losers as high valuations put pressure on fundamentals. You can't just slap "AI" on your investor deck anymore and watch the stock price soar.

Citi's 7,700 target implies a 12.7% upside from the index's recent close of 6,827.41. They're projecting S&P 500 earnings per share hitting $320 by the end of next year, which sits above the consensus estimate of roughly $310. That's a meaningful gap and suggests Citi sees earnings strength that others might be missing.

Big Tech Still Dominates the Story

The S&P 500's market cap leaders tell you everything about where this rally is centered: Nvidia Corp (NVDA), Apple Inc. (AAPL), Microsoft Corp (MSFT), Amazon.com Inc (AMZN), Alphabet Inc (GOOGL), Meta Platforms Inc (META), Broadcom Inc. (AVGO), and Tesla Inc (TSLA).

Nvidia made history in October by becoming the first company to top a $4.5 trillion market cap, fueled by insatiable demand for its GPUs as Microsoft, Amazon, Alphabet, and Meta pour billions into their AI ambitions. When the tech giants are all racing to build AI infrastructure, someone's got to supply the chips.

Not All Sunshine: Volatility Warning Lights Flash

Citi isn't just throwing out bullish numbers without acknowledging the risks. As the bull market enters its fourth year, they're warning that volatility could increase significantly. Their scenario analysis paints a wide range: a bull-case target of 8,300 versus a bear-case drop to 5,700. That's a massive spread and suggests considerable uncertainty about how this plays out.

Wall Street's Consensus: Bullish but Cautious

Citigroup isn't alone in its optimism. JP Morgan expects the S&P 500 to finish 2026 around 7,500, driven by a resilient U.S. economy and what global markets strategy head Dubravko Lakos-Bujas calls an "AI-led investment supercycle." According to Reuters reporting from November 26, JP Morgan's outlook assumes two additional Federal Reserve rate cuts followed by a pause. If policy easing goes further than expected, they see the index potentially climbing past 8,000 in 2026.

Lakos-Bujas projects 13% to 15% earnings growth for the S&P 500 over the next two years, backed by strong profit growth, heavy AI spending, rising shareholder returns, and supportive fiscal policy. That's a pretty comprehensive list of tailwinds.

Morgan Stanley is equally bullish, forecasting the S&P 500 reaching 7,800 by the end of 2026, according to Reuters reporting from November 17. They expect U.S. stocks to outperform global peers, driven by accelerating AI-related capital spending, strong earnings growth, and a supportive policy backdrop. The firm sees small-cap stocks and cyclical sectors leading gains as the Federal Reserve maintains a dovish stance.

But Morgan Stanley also cautions that uncertainty remains elevated, with the U.S. acting as the key swing factor for global markets. In other words, as America goes, so goes the world.

The Numbers Back Up the Optimism

Year-to-date performance shows the rally is already well underway. The S&P 500 Index is up 16%, which is solid but not spectacular. Where things get interesting is in the semiconductor space: the S&P 500 Semiconductor & Semiconductor Equipment Industry Index has surged more than 40%. That's the kind of outperformance that happens when an entire industry sits at the center of a generational technology shift.

The question now is whether this momentum can sustain itself through 2026, or whether we're setting up for disappointment as valuations stretch and fundamentals face scrutiny. Wall Street's major banks are placing their bets on continued growth, but they're also hedging with volatility warnings and wide scenario ranges. Smart money seems to think the AI story has more chapters to write, even if the next ones might be bumpier than the last.