Citi's Scott Chronert: Here's why we're seeing a market of 'reluctant bulls'

Key Concepts

• Market Pricing: The extent to which current market prices reflect anticipated future events and data.
• Year-End Price Target: A projection of where a market index or stock is expected to trade by the end of the year.
• Fundamentals and Earnings Trends: The underlying economic and financial performance of companies and the broader economy, which drives stock prices.
• Consumer Resilience: The ability of consumers to continue spending despite economic challenges.
• Business Resilience: The ability of businesses to maintain operations and profitability in a challenging environment.
• Sentiment: The overall attitude or feeling of investors towards the market.
• Positioning: The current investment allocations and strategies of market participants.
• Reluctant Bulls: Investors who are bullish on the market but are hesitant due to concerns about valuations or potential risks.
• Broadening Thesis: The idea that market gains are expanding beyond a few dominant stocks to include a wider range of sectors and market capitalizations.
• Cyclical Parts of Large Cap: Larger companies whose performance is closely tied to the economic cycle.
• US Small Midcap: Smaller and medium-sized companies in the US market, which often have inherent cyclicality.
• Overseas Exposure: Investments in international markets.
• Fed Trajectory: The anticipated path of interest rate changes by the Federal Reserve.
• NDX (Nasdaq 100): An index that tracks the 100 largest non-financial companies listed on the Nasdaq Stock Market.
• 200-day Moving Average: A technical indicator used to smooth out price data and identify trends.

Market Outlook and Current Conditions

Scott Croner, US equity strategist at City, discusses the current market environment, noting that the S&P 500 has achieved its first close above 6,800. He highlights that the market appears to be "pretty fully pricing" in upcoming events, including potential deals with China, Mag 7 earnings, and the Federal Reserve meeting. Croner's year-end price target for 2025 is based on projected 2026 fundamentals and earnings trends, indicating a forward-looking market that is anticipating positive developments.

Key Events and Data Inputs

• Fed Meeting: The first day of the Federal Reserve's meeting is underway, a significant event for market direction.
• Mag 7 Earnings: Earnings reports from the "Magnificent Seven" (mega-cap growth technology companies) are a key focus this week.
• China Deals: Potential deals involving China are also a factor influencing market sentiment.
• Government Shutdown: The ongoing government shutdown is creating a "relative vacuum of news," making corporate earnings reports the most crucial data source.

Corporate Earnings as a Primary Data Source

In the absence of extensive government data due to the shutdown, Croner emphasizes that corporate America's earnings reports are the "best set of data" available. These reports provide essential inputs for understanding the broader economy. The Q3 earnings season has thus far demonstrated "consumer resilience" and "underlying business resilience."

Market Sentiment and Investor Psychology

Croner observes a "dichotomy" in the market:

• Positioning: Market positioning is described as "quite bullish and quite extended."
• Sentiment: Despite bullish positioning, sentiment appears to be "weakening."

This leads to the concept of "reluctant bulls." These investors are aware of valuations and potential "bubble concerns," but they are hesitant to exit the market because they don't want to miss out on potential gains. They are willing to pay for incremental positive information but are likely to react with "stiff selling" to any disappointment, whether company-specific or macro. Consequently, "volatility is the name of the game here, both to the upside and to the downside."

The Broadening Thesis and Investment Opportunities

Croner's firm has advocated for a "broadening thesis" for some time. While acknowledging the dominance of mega-cap growth tech, they see opportunities emerging in Q4 due to the anticipated Fed trajectory:

• Cyclical Parts of Large Cap: Larger companies whose performance is more sensitive to economic cycles.
• US Small Midcap: Smaller and medium-sized companies, which inherently possess cyclicality.
• Overseas Exposure: Investments in international markets, supported by potentially supportive foreign central bank policies.

The broadening concept suggests a return to "laggards" that may offer short-term upside, with a longer-term conviction in underlying economic trajectories into 2026.

Technical Indicators and Market Momentum

Croner touches upon technical indicators, noting that the NDX (Nasdaq 100) is 18% above its 200-day moving average, a level not seen since the summer of the previous year, which preceded a correction. He states that given the market's recent move and valuation concerns, companies need to continuously deliver positive news and raise outyear earnings projections to sustain this momentum. The key question for the current week is "how much of that is priced in already relative to their ability to deliver that incremental upside."

Conclusion and Takeaways

The current market is characterized by a forward-looking sentiment, with investors pricing in expected positive developments. Corporate earnings are the primary driver of insights into economic resilience. A notable psychological dynamic is the presence of "reluctant bulls" who are invested but cautious. The market is also showing signs of broadening beyond mega-cap tech, with opportunities in cyclical large caps, small/midcaps, and international markets. While fundamental trends appear persistent, the market's ability to reward further upside hinges on companies exceeding already high expectations, making volatility a likely feature. Croner's 2025 playbook is currently playing out effectively.