The latest selloff comes as investors weigh stretched valuations against slowing momentum in major U.S. equity benchmarks. Market reaction to third-quarter earnings has increasingly hinged on whether companies can support high valuations with sustained growth into 2026.
BNN Bloomberg spoke with Scott Chronert, U.S. equity strategist at Citi, who says companies delivering both third-quarter beats and upward estimate revisions are being rewarded. He adds that investors remain uneasy despite heavy allocations to large-cap U.S. equities.
Key Takeaways
- Market gains increasingly depend on companies delivering both third-quarter earnings beats and higher estimates for the fourth quarter and 2026.
- S&P 500 earnings estimates for 2026 continue to rise, positioning the index to potentially exceed Citi’s base-case forecast.
- Small- and mid-cap stocks showing beat-and-raise performance have outperformed large caps, signalling selective opportunities despite broader weakness.
- Investor sentiment remains cautious even as allocations to U.S. large-cap equities stay elevated, a dynamic Citi calls “reluctant bulls.”
- The mix of high valuations, macro concerns and reliance on large caps points to heightened volatility as the bull market matures.
Read the full transcript below:
ANDREW: It has been painful for investors in U.S. stocks and that has helped drag down the Canadian market. Let’s get more from Scott Chronert, U.S. equity strategist at Citi. Scott, thanks very much for joining us. Of course, there are always blips in any bull market. What do you think has caused the weakness this week?
SCOTT: I think you’re identifying this correctly, Andy. We’re looking at a bit of a blip, or let’s call it a pullback. We went into the Q3 reporting period with pretty lofty expectations, whether you measure it through valuations or look at some of the implied growth characteristics underlying these stocks. Very simply, what has happened is that expectations stretched so far that it’s difficult for incremental news flow to support stock prices.
Short term, this by no means suggests the long-term trajectory of the AI playbook is over. I think it means that, from a shorter-term perspective, we’re in one of those periods where you get a bit of room for pause on the heels of what has been really strong performance since the April lows.
ANDREW: There are concerns about incredibly ambitious forecasts for revenue from AI. As you know, I was talking yesterday about OpenAI talking about spending a trillion dollars or so over the next decade. Has this stuff got out of hand?
SCOTT: When you talk about that degree of spending, it does two things. It gives you a fundamental tailwind for everything and every company that is in the line of sight of that spending. But it also begs the question: when is enough too much? Do you get to a point where it’s difficult to justify the incremental investments?
That storyline has been in the market for several months, and I think it will be in the market for months to come. At this point, though, it does look as if the underlying demand for AI strategies is in excess of supply. I think the underlying tailwind is still in pretty good shape, but we will have to navigate these nuances as they come up over time.
ANDREW: What themes emerge for you from the earnings season? I know you and I have touched on this before.
SCOTT: The way we’ve looked at it, it was a very strong reporting season in the U.S., with earnings up about 11 per cent above consensus for 8 per cent going in. But the formula for success this reporting period has been not just a Q3 earnings beat. You also needed to see Q4 estimates revised higher, and you needed to see full-year 2026 estimates revised higher.
We have to keep in mind this is a market that has had a strong run. The valuation concept comes up all the time, but what’s happening is that we’re premising views on these companies not on 2025 results, but on where you think 2026 and beyond expectations are going. The formula for success during earnings season has been feeding that machine — seeing upward trajectory in out-year growth expectations. That has been the single biggest differentiator, whether you’re in the large-cap part of the U.S. market or down in small and mid-cap.
ANDREW: You’ve talked to us before about “reluctant bulls” — the market doesn’t want to be bullish but finds itself obliged to be.
SCOTT: When you’re a professional investor or even a retail investor, you’re looking at the action in the markets, particularly since the April lows, and it’s hard not to engage and participate. What we’re sensing in our work is this combination: from a positioning perspective, investors are very well engaged in the market, with equity allocations high versus history. But when you look at specific sentiment indicators, it’s a much different picture. There’s much more concern about how to think about some of these spending trajectories.
We frame it this way: investors are in the market and they know they’ve got a valuation concern, and this “bubble” phrase keeps coming up. But sentiment is more middle-of-the-road than positioning. What that means for our reluctant bull concept is that incremental news pushing expectations for out-year growth higher will be rewarded — and that was the story of Q3 reporting season.
At the same time, any noise that disrupts this setup will trigger selling, which is what I think we’re dealing with this week. The reluctant bull component has two sides: a bullish and a not-so-bullish response. This week, we’re seeing the not-so-bullish, or bearish, response.
ANDREW: Broadly speaking, what will 2026 look like? Is there a prospect for a decisive catch-up by small and mid-cap stocks?
SCOTT: I think there is. The 2026 setup, given the valuation starting point for U.S. markets, is such that you can’t expect much in the way of valuation improvement going into 2026. Rather, the way we think it will play out is that it will align more closely with earnings growth trends.
As I mentioned, for 2025 targets we’re already using 2026 estimates in our assumptions. As we go into next year, we’ll quickly fast-forward to how persistent this earnings growth tailwind looks. Will it persist into 2027 and beyond?
Our point is we think we’re in good shape for broader earnings acceleration next year. Interestingly, we think there is a catch-up growth opportunity in U.S. small and mid-cap stocks. You could say the same about some international markets. This broadening construct, we think, will continue into 2026. We want to be engaged in the AI playbook — we think it still has legs — but we think there’s a strong argument for new money going into areas that haven’t participated to the same degree. U.S. small and mid-cap would be one of those.
ANDREW: Scott, thank you very much. Really appreciate it and have a great weekend.
SCOTT: Thanks, Andrew. Take care.
ANDREW: Scott Chronert, U.S. equity strategist at Citi.
---
This BNN Bloomberg summary and transcript of the Nov. 14, 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.
