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Citadel’s Scott Rubner offers an analysis of the current equity market and what might play out in the near future in a note from October 14th. Rubner reports that consensus is expecting high earnings growth for Q3 (being reported now), about 27% year over year, “the third-highest expectation heading into a reporting season since 2010, behind only the two pandemic-recovery quarters.”
But this earnings growth is not evenly distributed. Nvidia and Micron account for more than a third of expected earnings growth, and the ten largest contributors represent about two-thirds of the expected growth. Nvidia saw growth of 581%, 145%, and 65% in fiscal years 2024, 2025, and 2026. Micron’s net income in fiscal year 2024 grew 113% and then 998% in fiscal year 2025. In fiscal year 2026, ending in September of this year, net income grew another 895%, on a base of $8.5 billion. That is incredible. But it’s likely also unsustainable!
While the dotcom boom is known for companies with no earnings achieving lofty stock market valuations, in fact, during that time frame many companies saw incredible earnings growth. From 1998 to 2000, earnings for the technology sector (based on a constant sample of 523 publicly traded tech companies), grew 38% annually.
What’s different today is that the earnings growth is being driven by the highly cyclical semiconductor industry. The world has never seen a boom like this in world semiconductor sales.
Rubner’s conclusions:
Our constructive Q4 view remains intact, with several of the dynamics highlighted in our last note beginning to materialize.
- Earnings: Expectations remain exceptionally strong, with forward earnings estimates rising even as valuations have compressed. Nearly half of the S&P 500 will report in five sessions, while corporate buyback windows begin reopening against a record year of authorizations.
- Rotation: Equal weight has begun to recover from historically depressed relative levels, with improving participation across defensives, cyclicals and rate-sensitive sectors. The recovery in market breadth is an encouraging development after months of narrow leadership.
- Retail: Buying has accelerated sharply, driven by stronger directional conviction rather than higher volumes. Demand remains concentrated in index ETFs, Semiconductors and AI infrastructure, alongside record-paced buying of fixed-income ETFs.
- Volatility: Single-stock volatility continues to outperform the index as correlations remain near historical lows. Earnings could reinforce that divergence, while low index implied volatility offers relatively attractive protection against a shift toward correlated selling.
We continue to favor selective single-stock exposure over simply adding index beta. The recent improvement in participation is promising, but the next several weeks will provide a much more meaningful test of whether it can persist.
While right now it may be useful to focus on single stocks, one might be careful not to overload on something like Micron or Nvidia, which are the beneficiaries of the AI buildout but which still represent a typically cyclical industry that has always in the past seen booms followed by incredible busts.