Citi: Restructuring the US stock market positioning framework, replacing "Mag 7" with "clusters" to capture the AI growth narrative

```htmlGelonghui July 21｜Citi released a report stating that the "Mag 7" concept is no longer valid and advocates for a "cluster" analysis framework. Citi believes that the "Mag 7" (seven major US tech giants) is no longer an effective construct for assessing large-cap growth dynamics. With the advancement of AI infrastructure, more stocks—including Broadcom (AVGO), Micron (MU), and AMD—have become key drivers of index returns and earnings growth. Citi supports dividing the S&P 500 into three main clusters: “Growth”, “Cyclicals”, and “Defensives”, in order to more comprehensively capture the impact of the AI wave.The Growth cluster dominates S&P 500 performance and earnings. Currently, the Growth cluster accounts for 55% of the S&P 500’s market capitalization and contributes nearly 48% of its earnings. Analysts expect that this cluster will see EPS grow by 42% in 2026, making it the primary force behind the overall 24% EPS growth of the S&P 500. Despite a pullback in the first quarter, the Growth cluster remains ahead in performance year-to-date (YTD).Valuations are supported by strong earnings revisions and are not expensive relative to history. While the absolute valuation of the Growth cluster is higher than that of the Cyclicals and Defensives clusters, relative to its own 30-year history, its valuation is not excessively stretched. Its next twelve months price-earnings ratio (NTM P/E) is at the 66th percentile of historical levels, boosted by ongoing “beat-and-raise” earnings revision momentum. Consensus estimates show that over the past year, 2026 EPS forecasts for the Growth cluster have been revised upward by 30%.Index volatility will remain elevated, and traditional valuation comparisons require caution. The increase in the Growth cluster’s weighting in the index (rising from less than 20% thirty years ago to 54% today) has changed market structure. This means the S&P 500 no longer directly reflects the broader US economy as commonly assumed. As growth stocks typically have higher beta values, the realized volatility of the index is expected to remain above historical levels. In addition, long-term historical index valuation comparisons are now less relevant due to structural changes.```