To The Moon

US stocks have entered the third-quarter earnings season, and market focus is shifting from macro headlines, positioning adjustments, and the AI narrative back to corporate earnings themselves. Citadel Securities chief equity and derivatives strategist Scott Rubner said he remains constructive on US equities for the fourth quarter, but the coming weeks will serve as a more meaningful stress test of the fundamental backdrop.

The bar for this test is high. The consensus expects third-quarter S&P 500 earnings per share to grow about 27% year over year, the third-highest pre-season expectation since 2010 and below only two post-pandemic recovery quarters. At the same time, valuations have already compressed, investor demand is beginning to recover, and early changes in market leadership are emerging.

The earnings calendar is highly concentrated. Citadel Securities noted that within the five trading days from October 28 to November 3, companies representing roughly 47% of S&P 500 index weight will report results and contribute about one-third of expected earnings growth. That means the market will test, in a very short window, whether high earnings expectations can be met.

For investors, the key question is whether earnings growth can broaden from a handful of leaders to a wider group of companies. Retail buying has picked up, the equal-weight index has rebounded, and single-stock volatility has risen, all signs that the market's internals are changing. But index volatility remains low, and if rotation turns into synchronized de-risking, correlations could rise quickly.

Earnings expectations remain high and the earnings-season bar keeps rising

Citadel Securities said that despite a pressured September for US stocks, the earnings bar remains extremely high. Over the past 20 quarters, actual corporate earnings growth exceeded pre-season consensus in 19 quarters. In the last two quarters, actual growth came in about 10 percentage points above pre-season expectations. In the second quarter, 88% of S&P 500 companies beat EPS expectations, the highest share outside the 2020-2021 recovery period.

Third-quarter expectations have also continued to be revised higher ahead of the season. According to data compiled by Citadel Securities, from July 1 to the start of the earnings season, overall S&P 500 earnings expectations were revised up 1.6%, the second-strongest pre-season upward revision in the past five years and below only the second quarter of 2026. This also marks the fifth consecutive quarter of pre-season earnings upgrades at the index level.

The divergence between improving earnings and compressing valuations is especially clear in semiconductors, memory, and AI infrastructure. Since the end of June, forward 12-month EPS expectations for the memory sector have risen 25%, while its forward price-to-earnings ratio has fallen 34%. For AI infrastructure, forward 12-month EPS expectations have risen 25%, while the forward P/E has dropped 22%. Over the same period, S&P 500 forward 12-month EPS expectations have risen 10%, while the forward P/E has fallen 6%.

Corporate guidance also remains strong. Over the past four quarters, S&P 500 companies have raised guidance nearly three times as often as they have cut it. Citadel Securities said that excluding the 2009-2010 and 2020-2021 recovery periods, this is one of the most supportive periods for corporate guidance in 20 years of data.

Growth is highly concentrated, with a few companies carrying the main contribution

A core feature of third-quarter earnings growth is its high concentration. Citadel Securities pointed out that Micron and Nvidia together account for 36% of expected S&P 500 earnings growth. The top ten contributors together account for about two-thirds of expected growth. Excluding those ten companies, expected S&P 500 earnings growth would fall to about 11%. The 300 smallest S&P 500 companies by market capitalization are expected to deliver earnings growth of about 5%. This shows that high growth at the index level still depends clearly on a small number of sectors and a small number of companies.

Still, earnings diffusion is not entirely absent. About 74% of S&P 500 companies are expected to post positive year-over-year earnings growth, above the 66% median since 2021. The key over the coming weeks is whether this breadth can be confirmed through actual results and guidance.

The buyback window may also reopen. The market is currently in the peak earnings blackout period, with only 24% of S&P 500 index-weighted companies outside buyback restriction windows. Citadel Securities expects that share to rise to about 55% by the end of the month, about 75% by November 3, and about 85% by November 9.

So far this year, US companies have announced a record $1.3 trillion in share buyback authorizations, 8% above last year's record level. The technology sector contributed $573 billion, or 43% of the total. As earnings disclosures progress, corporate buying may once again become a technical support for the market.

Market rotation is emerging, and the equal-weight index has rebounded from lows

Over the past few trading sessions, one of the most notable changes within US equities has been the improvement in equal-weight performance relative to mega-cap leaders. In the prior quarter, index performance was mainly driven by a small number of large stocks. Citadel Securities said more sectors have recently begun to participate in the rally, signaling an early repair in market breadth.

The ratio of the S&P 500 equal-weight index to the Nasdaq 100 fell on October 7 to its lowest level since April 2000. Since mid-August, that ratio has lagged by nearly 9%. In the following three trading sessions, the equal-weight index outperformed the Nasdaq 100 by 2.8%, a move in the 95th percentile since 1990.

But the rebound is still in its early stages. Despite the recovery, the ratio remains in the 2nd percentile of its five-year range. Citadel Securities cautioned that in historical cases of similar rebounds from extreme relative lows, fewer than half sustained equal-weight outperformance over the following month.

Market breadth is also improving. Since the equal-weight-to-Nasdaq 100 ratio bottomed, 76% of S&P 500 constituents have outperformed the index. Defensive sectors rose 2.2%, rate-sensitive sectors rose 2.0%, and cyclical sectors rose 1.6%. Technology lagged, with only 42% of its constituents advancing.

At the same time, the share of S&P 500 constituents trading above their 50-day moving average rose from 25% to 37%. However, that share is still in the 16th percentile of the past year. For the market, the earnings season will test whether this breadth repair can continue.

Retail buying returns, with flows concentrated in ETFs and the AI chain

Retail buying is recovering even as overall trading activity remains below average. Data from Citadel Securities' platform showed that retail investors net bought $9.1 billion of US stocks last week, the largest weekly net buying in 15 weeks and the ninth-highest level in the past year.

The increase in buying came mainly from a stronger directional tilt rather than a surge in trading volume. Last week, retail buying propensity exceeded selling propensity by 2.7 percentage points, in the 90th percentile of weekly directional skew. Over the same period, total trading activity was only in the 42nd percentile of the past year. Over the past three weeks, weekly retail net buying rose from $4.8 billion to $6.4 billion and then to $9.1 billion.

Fund flows were highly concentrated. The semiconductor sector saw $2.6 billion in net buying, the third-highest weekly level in the past year. At the current pace, October could become the largest month for semiconductor net buying on Citadel Securities' platform, running at three times the past year's average pace. AI infrastructure saw $2.4 billion in net buying, the fourth-highest in the past year. Neoclouds saw $700 million in net buying, the largest weekly accumulation observed for that group.

Fixed-income ETFs are also attracting retail demand at a record pace. In the first seven trading days of October, retail investors net bought nearly $3 billion of bond ETFs, an average of $422 million per day, 28% above the prior monthly record pace. Buying was concentrated in short-term Treasury bills and ultra-short-duration, municipal bond, and US Treasury ETFs. Demand for credit, loan, and CLO ETFs was only 0.4 times normal levels. If the current pace continues, October will be the largest month for retail fixed-income ETF buying in that data set since 2017.

Index volatility is subdued while single-stock risk keeps rising

Citadel Securities noted that one of the market's most striking features is the persistent divergence between single-stock volatility and index volatility. Rotation between winners and losers across individual stocks and sectors has pushed up single-stock and sector volatility. But offsetting moves within the index have kept index volatility near lows of the past year.

Since September 29, the average one-month at-the-money implied volatility of S&P 500 constituents has risen from 34.1% to 36.4%. Over the same period, S&P 500 implied volatility has fallen from 13.2% to 11.7%. The spread between the two has widened by nearly 4 volatility points to 24.7, in the 90th percentile of the past year.

The ratio of single-stock volatility to index volatility has risen to 3.1 times, in the 98th percentile. One-month implied correlation has fallen to 7.6%, the 1st percentile since 2006. Implied volatility in sectors including banks, biotech, AI, and software has strengthened markedly relative to S&P 500 volatility.

Realized volatility at the index level is also subdued. The S&P 500 has not had a single-day move of 2% or more since June 5, a streak of 88 trading days without such a move. The index has also gone 52 consecutive trading sessions without a 1% decline. Ten-day realized volatility has fallen to 7.2%, in the 5th percentile of the past year.

Broad-based selling has also been absent for a long time. Citadel Securities said the New York Stock Exchange has gone nearly a year without a trading day in which declining volume accounted for at least 80% of total volume. The last such occurrence was on November 17, 2025, about 225 trading days ago, already the longest gap in nearly 30 years of data.

Market conclusion for the coming weeks: selective single-stock exposure is better than simply adding index beta

Citadel Securities' conclusion is that the constructive view on fourth-quarter US equities remains valid. Earnings expectations are strong, valuations have compressed somewhat, retail buying is recovering, the corporate buyback window is about to reopen, and market participation is beginning to improve.

But these supports need to be validated by earnings. About half of S&P 500 weight will report within five trading days, a small number of companies still account for the main contribution to earnings growth, and low index volatility is masking rising risk at the single-stock level.

Scott Rubner believes the recent improvement in participation is worth watching, but the coming weeks will more effectively test whether this trend can continue. In the current environment, Citadel Securities continues to prefer selective single-stock exposure, which aligns better with a market structure of diverging earnings and diverging volatility than simply adding index beta.