Citi said the U.S. first-quarter earnings season delivered genuine strength but cautioned that the headline beat obscured a more complicated picture beneath the surface.
The bank said roughly half of the index-level earnings upside in the first quarter was driven by one-time items, including tariff add-backs and asset mark-ups. Stripping those out, the beat aligned more closely with prior trends, suggesting fundamental growth remained solid but not exceptional.
Citi said concentration was a defining feature of the quarter. Twenty stocks accounted for the majority of index earnings upside, with technology companies leading the way. Forward guidance increases showed a similarly narrow focus, with the same cluster of names driving consensus revisions for the second through fourth quarters.
The bank described a bifurcated market shaped by two competing forces: artificial intelligence tailwinds on one side, and the influence of the Iran conflict and oil prices on the other.
Growth sectors with exposure to AI continued to post strong upside revisions and outperformed on price. Energy stocks also stood out, with the Iran conflict pushing oil prices higher and lifting forward estimates for the sector. Consumer discretionary names lagged, as fuel costs and inflation weighed on demand expectations.
Citi estimated that roughly half of the S&P 500 by weight was tied to AI-driven growth, while the remainder reflected exposure to the macroeconomic and geopolitical risks surrounding Iran, oil, and inflation.
The bank said first-quarter results and second-through-fourth-quarter revisions were consistent with that split.
Citi said a broadening of market participation was a necessary condition for meaningful index upside from current levels. That broadening, the bank added, would require greater visibility into a wind-down of the Iran conflict and what it meant for oil prices, inflation, and interest rates.
Until that clarity emerged, the bank said the index was likely to remain hostage to the same narrow group of outperformers that defined the first quarter.
The S&P 500 was trading up 8% so far this year, with a bulk of gains powered chiefly by tech shares on optimism over AI. Nvidia was a major driver of this run-up, with the chipmaker coming in sight of a $6 trillion valuation amid bets that it will continue to benefit from AI spending. The world's most valuable listed company is set to report fiscal first quarter earnings next week.
