This year’s broader market rally isn’t over just yet, according to Citi. “We look for further S & P 500 upside in the year ahead. However, investors need to be prepared for changing conditions as 2024 unfolds,” market strategist Scott Chronert wrote in a Friday note. “Following the strong Q4 2023 rally, pullbacks should be expected, and bought into, as a shifting Fed narrative unfolds.” Citi set a year-end target of 5,100 for the S & P 500, dependent on a $245 earnings per share estimate for the index. Looking ahead, however, the firm lowered its mid-2024 target to 4,800 to allow for economic softening for the first half of next year. “On our full-year scenarios, the market is pricing in a higher probability of our bear case than bull,” Chronert said. According to the strategist, some “near-term restraint” is required amid strong fourth-quarter gains this year and lingering macroeconomic complications. “A constructive micro backdrop should put a higher floor under equity markets, meaning pullbacks should be bought,” he said. Diversifying beyond 2023’s mega-cap growth leadership is a key theme headed into next year, according to the firm, which advocated for gradually rotating away from mega-cap growth names as more sectors and individual stocks contribute to the year-end rally. Moving forward, Chronert advised holding growth stocks and adding to cyclicals, select defensive names and more fundamentally leveraged small- and mid-cap companies to play the broadening of the S & P 500 rally this year. Growth looks expensive compared to the sector’s history and could face some multiple compression, he said. This year, outsize gains from the “Magnificent Seven” group of tech stocks — which comprises nearly 30% of the S & P 500 and includes names such as Apple , Nvidia , Alphabet and Microsoft — have dominated the broader market. The Bloomberg Magnificent 7 Price Return Index shows the basket has jumped about 97% this year. The S & P 500 , meanwhile, is up nearly 20% in 2023. The final weeks of 2023 have seen a jump in enthusiasm for other areas of the equity market, however, including in the small-cap Russell 2000 index and health-care sector, which were among this year’s laggards. Chronert’s outlook next year calls for a “complicated macro” but “constructive micro.” In the macro world, he expects volatility will likely rise with the Federal Reserve expected to lower interest rates next year, which could affect sector performance patterns. The upcoming presidential election and geopolitical issues, such as Sino-U.S. relations, could also negatively affect equity valuations, Chronert said. Still, the firm believes that a positive earnings growth inflection will drive stronger free cash flow. “Our top-down sector earnings modeling continues to argue for more consistent sector level growth during 2024. Additionally, an ongoing earnings resilience theme continues even as recession risk persists,” Chronert said about Citi’s microeconomic outlook. “Investors should expect Growth to de-rate next year while Cyclicals re-rate, generally holding broader index level valuations near current levels.”