Citi View: Nasdaq 100 is the preferred choice for positioning in the AI construction cycle

Citigroup Research released a US stock strategy report on Thursday, considering the Nasdaq 100 Index (NDX) as the "optimal vehicle" for participating in the AI infrastructure construction trend, with a purer allocation value compared to traditional large-cap growth indices, and pointed out that the current combination of fundamentals and valuation presents a "strike and defend" situation.

Leading Growth Track

The Nasdaq 100 has risen 13.3% year-to-date, leading among mainstream growth indices— the S&P 500 Growth Index (SGX) rose by 9.1% in the same period, and the Russell 1000 Growth Index (RLG) only rose by 4.0%. The index is currently about 10% higher than its 2025 peak, while the S&P 500 is only about 6% higher over the same period.

The core of this strong performance lies in the composition of the index's constituents: the top ten weighted stocks account for about 47% of the index, with NVDA, AMD, Broadcom, and Micron providing differentiated semiconductor exposure, and Microsoft being the only leading software company in the top ten.

Citigroup strategist Scott Chronert pointed out that compared to the S&P 500 Growth Index, which includes a large number of non-tech weights, NDX has a more focused and pure exposure to giant tech stocks and AI themes.

Earnings Revisions Continue to Exceed Expectations

Citigroup's data shows that the 2026 earnings forecast for NDX has been revised up by nearly 20% from the market peak in October last year, and the 2027 earnings forecast has also been significantly revised up from the beginning of this year, with a consensus estimate of about 18% year-over-year growth.

In the first quarter of 2026, earnings greatly exceeded expectations, partly due to the revaluation of the book value of AI investments in companies such as Anthropic by a few giants, which boosted GAAP profits; but even excluding this factor, the underlying fundamental improvement is also undeniable.

On the profit margin level, Citigroup expects the net profit margin to increase from 19.4% in 2025 to 22.6% in 2026, and further expand to 23.4% in 2027; the EBIT margin also increases from 23.3% in 2025 to 28.7% in 2027. The return on equity (ROE) is expected to reach 31.0% in 2026, and although it will slightly decline to 28.6% in 2027 due to the decrease in financial leverage, the absolute level remains strong.

Valuation is high, but supported

The current forward P/E ratio of NDX is about 25 times, which is at the 77th percentile of the past 20 years' history, higher than the mean but close to the level before the COVID-19