Roughly one-third of S&P 500 companies have now reported their third-quarter earnings, with results tracking ahead of expectations. Citi says the data signal a healthier market backdrop, supported by resilient fundamentals.
BNN Bloomberg spoke with Scott Chronert, U.S. equity strategist at Citi, who described current investor sentiment as one of “reluctant bulls.” He said concerns about valuations, credit and macroeconomic risks persist even as investors stay committed to U.S. equities, suggesting a cautious optimism shaping the market’s next phase.
Key Takeaways
- About 30 per cent of S&P 500 firms have reported results, with earnings surprises running roughly seven to one.
- Citi expects ongoing strength in tech and cyclical sectors such as financials, retail, durables and capital goods.
- Investor sentiment remains cautious, with many maintaining exposure despite fears of valuation bubbles and credit risk.
- Consumer staples and industrials are underweights due to stretched valuations and margin pressure from tariffs.
- Citi expects volatility to rise as the bull market matures and investors react sharply to both good and bad news.
Read the full transcript below:
ANDREW: About 30 per cent of companies in the S&P 500 index have reported third-quarter results, and Citi says earnings are shaping up better than expected. Let’s get more from Scott Chronert, U.S. equity strategist at Citi. Scott, thanks very much for joining us. Just give us an overall view here — have beats exceeded misses, for example?
SCOTT: Good morning, Andrew. So far into the quarterly reporting period, what we’re seeing is a positive surprise dynamic that’s a little stronger than we would have expected. The typical setup is that you tend to see revisions lower heading into a reporting period, which then sets up for a more normal upside surprise.
This time, however, we did not see the same magnitude of negative revisions. In fact, expectations have remained quite solid. We were anticipating a more normal upside surprise in the three to four per cent range, but over the last few days we’ve seen a Q3 positive surprise closer to seven to eight per cent. That shows how strong S&P 500 fundamentals are right now.
We have a big week ahead, with five of the “Magnificent Seven” reporting. That will be the real test in terms of how earnings compare to what’s already priced into stocks. Overall, I’d say this earnings season is shaping up quite smartly.
ANDREW: Speaking to big investors, you’ve said a lot of them are reluctant bulls. They’re steadfast in holding big-cap stocks, but worried about the risk of an AI bubble.
SCOTT: Yes, that’s the intriguing storyline. It seems like every conversation these days comes back to valuation and bubble concerns — largely a hangover from the tech bubble of the late 1990s and early 2000s, as well as recent worries about credit.
Even though positioning has been quite bullish in U.S. equities, when you talk to investors about sentiment, it’s actually fairly nervous given the run-up and heightened valuations. So we’re using the phrase “reluctant bulls” to describe the current environment.
What that tells us is to expect that ongoing positive surprises and stronger forward expectations will likely drive stocks higher. On the flip side, any disappointments could trigger quick selling. As a result, we expect heightened volatility through this reporting period.
ANDREW: In terms of sectors you like, you’re overweight financials and information technology, right?
SCOTT: Yes, and I’d add that we’re generally focused on the growth parts of the market for the fourth quarter — that’s where our long-standing tech overweight comes in. Semiconductors and software fit that view.
We’re also suggesting increased exposure to cyclical parts of U.S. equities. We lead with a financials call — mainly large-cap banks — but we also see opportunities in other cyclical areas such as retail, durables like homebuilders, and capital goods.
Right now, the S&P 500 is beating to two drums: one is the AI tailwind, and the other is the broader economy. As we move further along the Federal Reserve’s rate-cut path and into 2026, the market appears set up for continued broadening. That’s why we’re incrementally increasing our cyclical exposure.
ANDREW: A couple of areas you’re cooler on include consumer staples and industrials. Starting with industrials, why are you relatively wary there?
SCOTT: Industrials have been an underweight for us all year — and let’s acknowledge we’ve been wrong on that call. Areas tied to aerospace and defence, as well as some that benefit indirectly from AI infrastructure buildouts, have led that sector higher.
But that’s resulted in outsized valuations, with those stocks looking expensive versus their history. So while we acknowledge the move, we think more is being priced in there than justified. From a cyclical, economically sensitive perspective, other areas stand out more.
As for consumer staples, we see some risks tied to ongoing tariff issues that could pressure margins. The problem is that companies may not be able to fully pass along higher costs to consumers, given stretched household budgets. We’re concerned these firms lack the pricing power they’ve had historically, so we’re underweight there relative to traditional retail, where rate cuts could provide more upside leverage.
ANDREW: Scott, thank you very much.
SCOTT: You bet. Have a good day, Andrew.
ANDREW: You too. That’s Scott Chronert, U.S. equity strategist at Citi.
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This BNN Bloomberg summary and transcript of the Oct. 29, 2025 interview with Scott Chronert are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
