Citi equity analysts on the key valuation issue facing the market.

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Citi’s US market analyst on the key valuation test facing the market

“It kind of comes down to, what inning do you think we are in this AI game?”

9/26/25 9:51AM

Citi US equity strategist Scott Chronert feels your pain.

The market is obviously expensive. But it’s been that way for some time.

And anyone who sold out of discomfort with P/E ratios in the 20s — which the S&P 500 has sported since January 2024 — has missed out on a gain of more than 35%.

In a recent note, Chronert spotlighted the aggressive growth expectations — what he calls an “earnings obligation” — that seem to have supported stocks in recent months, but will have to be justified by Q3 earnings results when they start rolling in just under three weeks.

We got him on the phone to talk a bit about risk that expectations may have gotten too optimistic, setting stocks up for an ugly collision with reality.

Here are highlights from our conversation, edited for clarity and concision:

Sherwood News: What’s the key question for the market right now, as you see it?

Scott Chronert: It kind of comes down to, what inning do you think we are in this AI game, AI infrastructure build-out. And the Citi house view is that we’re still early innings.

So when I look at that setup, therefore, I have to consider whether these companies will keep surprising to the upside on earnings the way they have. That’s sort of a shorter-term dynamic.

I also have to weigh in the persistency of that growth. Can these companies continue to demonstrate this kind of growth over the next several years?

Historically, when you look at periods like this where there have been seemingly excessive valuations — think about the tech bubble or the 2021 rally coming out of Covid — what ends up happening is that the fundamentals don’t persist.

Sherwood: So when you say the fundamentals “don’t persist,” essentially you’re saying strong sales and profits don’t continue to be strong. They fall off.

Chronert: Yeah, they fall apart. And historically speaking, that’s where you get your bigger downdrafts, because you’ve been embedding an expectation in the market that doesn’t get fulfilled.

Fast-forward to where we are currently and most people would say, well, gosh, this is a high-valuation market.

Sherwood: Yeah, I saw we cracked a multiple of 23x on the S&P 500 forward P/E. We haven’t really seen levels that high since the tech bubble — outside of the post-Covid boom. Where do you see similarities between the current market and the tech stock boom that got going in the late 1990s?

Chronert: Essentially in the tech bubble, we were building out internet infrastructure. This time, we’re building out AI infrastructure.

The other similarity is that it was sort of a new technology paradigm that fostered both a lot of innovation and a lot of hype, let’s say. And we’re seeing something comparable.

The difference, though, is the nature of the companies involved in the spending on the infrastructure build-out. Today you’ve got giant companies with large cash flows that are supporting a lot of the spending.

Less of the money for investment is coming from IPOs and debt issuance. More of it’s coming from existing cash or free cash flow. So it’s a healthier starting point, which I think gives the cycle more of a chance of persisting.

And if we’re looking at a protracted investment cycle that goes for another couple years, or several years, then I think it kind of sets us up for what we’re arguing is still a structural bull case for US equities.

Sherwood: Growth expectations for sales are one thing, but also it’s worth thinking about the fact that profits are at a very high level, too. Is that a potential worry?

For instance, if you look at profit margins, or absolute profit levels or profits as a share of GDP, doesn’t that raise the difficulty of keeping this profit growth going? We’re not starting from the low level where we were during Covid.

Chronert: It’s a good point, a good question.

A lot of this is going to be persistence for revenue growth combined with fairly high gross margin structures, which mean a lot of operating leverage. So what then happens is your return metrics — whether it’s return on equity, return on invested capital, pick your return metric — they begin to really, really surge. And so far, with the big capex investors, what we’re seeing is that you haven’t seen much deterioration in a lot of the profit metrics.

But there’s no question that you don’t want a very profitable business model to unwind. So that’s among the things that we’re going to have to keep an eye on.

Sherwood: In your recent note, you do say you have a nagging concern about whether the “raise” component — companies updating and lifting sales and profit forecasts as part of the quarterly reports — will satisfy the market during Q3 earnings season. Can you flesh that out for me a bit?

Chronert: The question is simply whether, as we go into the Q3 reporting period, are we going to get healthy growth projections? And will they match, or exceed, what the stocks are discounting or expecting?

Sherwood: And the only way to assess that is how the stock reacts after the numbers, right?

Chronert: Pretty much. We’re allowing for some volatility around that reporting period. But at the same time, we’ve got the Fed with its next wave of rate cuts coming, and that still sets us up for a stronger finish to the year.

Sherwood: But is there a point where we should worry that these high valuations mean we’re overpaying for future growth?

Chronert: I think the point we’re making and the way I kind of wrote that note is that if you sold just on valuation, you’ve been selling for the past year. How’s that done for you?

Sherwood: I guess it depends how the next year goes. If we crash 50% in 2026, selling the market this year will look like a pretty smart move in retrospect.

Chronert: Well, we’re saying we think this particular AI-related effect has room to run. And I think, implicitly, we’re saying it’s going to be tough to call the top.

Sherwood: Broadly, how reliant is this market on the AI story? If there were to be a setback in AI, how tough would that be for the broader market to weather?

Chronert: We’ve done some other work on that, and we’ve said almost 50% of the S&P market capitalization appears to be AI-influenced.

So essentially you’re running dual markets. You’re running a market that’s sort of all about AI as a driver, and then you’ve got the other half that has more traditional drivers. I’m probably more concerned about the AI side of the market than the non-AI side of market because of the embedded expectations we’ve been talking about.

Sherwood: Thanks very much for your time.

Chronert: Take care.

Tasha Matsumoto

Despite a modest rebound in tech, the S&P 500 closes slightly lower

The S&P 500 managed to erase most of its early morning losses through the session.

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Speculative stocks rebound from early sell-off

As we head toward the last hour of a wild week of trading, the buckle-up vibes the market started out with Friday have mellowed into a modestly positive day, with the Invesco QQQ Trust and the SPDR S&P 500 ETF both in the green.

But the volatility was pretty wild for some of the high-beta momentum stocks that have taken some of the worst beatings in recent days.

Shares like Applied Digital and Bloom Energy saw cumulative swings on the day along the lines of 20 percentage points. Even those that haven’t quite managed to stay positive, like IREN and Oklo, have nonetheless erased sizable losses.

Why? Frankly, it’s impossible to say. The same uncertainties that the market was facing yesterday — doubts about further rate hikes, confusion about the state of the economy, jitters about the potential for the AI boom to turn into a bust — are still hovering out there somewhere. Perhaps it will take more than a 2-percentage point drop from record highs for the major indexes — about the extent of the recent sell-off — to dull the retail reflex to buy the dip.

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Micron spikes on report that Samsung hiked memory chip prices by as much as 60%

Memory chip specialist Micron is soaring after Reuters reported that Samsung has raised prices of select memory chips by as much as 60% since September, citing two people with knowledge of the price changes.

Memory chips play a key supporting role in the AI boom by feeding high-powered GPUs with data to process.

Micron, the biggest US memory chip seller, has been on an absolute tear, more than doubling in price since the end of August. Shares recently traded more than 15% above the average analyst price target, a record based on data going back to 2007.

These days, you need a pretty good memory to keep up with all the bullish news flow surrounding memory chip stocks, whether it’s been reports of imminent price hikes for these chips, South Korean memory giant SK Hynix already being sold out of all its 2026 production, or Nvidia CEO Jensen Huang nodding at shortages of these valuable components.

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Warner Bros. Discovery rises as potential sale boils down to bidding war between Paramount, Comcast, and Netflix

The potential sale of Warner Bros. Discovery appears to have boiled down to three contenders: Paramount Skydance, Comcast, and Netflix.

All three entertainment giants are prepping bids for WBD, with a deadline of next Thursday for first-round offers, according to Wall Street Journal reporting. Warner Bros. shares climbed more than 2% in premarket trading on Friday.

Per the WSJ, Comcast and Netflix are mostly interested in WBD’s streaming assets, while Paramount — which is said to have had three offers rejected already — wants to buy the whole company.

According to people familiar with the companies’ plans, Paramount believes it has the clearest path toward regulatory approval, as it thinks Netflix’s cofounder, Reed Hastings, having supported Kamala Harris in the 2024 presidential election could be a significant hurdle in getting a deal approved, per the WSJ.

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Per the WSJ, Comcast and Netflix are mostly interested in WBD’s streaming assets, while Paramount — which is said to have had three offers rejected already — wants to buy the whole company.

Luke Kawa11h

Beyond Meat’s refinancing efforts that spurred meme stock rally now have shares down 67%

Well, with a bit of time and a lot of volatility, the dust is settling on how Beyond Meat’s refinancing efforts have gone.

This morning, management announced that its new 2030 notes could be converted at a price of about $1.7459, or around 85% above where shares are trading in the premarket in the midst of another big retreat.

The twists and turns that brought us here:

On September 29, the company announced its intention to replace $1.15 billion in convertible notes due in 2027 (with an interest rate of 0%) with a mix of stock and up to $202.5 million in new second lien convertible notes due in 2030 (with an interest rate of 7%). Prior to that, its stock closed at $2.85.

Shortly after management reached a deal with 97% of its 2027 noteholders in mid-October, Beyond Meat became a meme stock. Despite massive dilution that raised the company’s share count by more than 300% and made prior noteholders the new corporate owners, retail traders positioned for a potential short squeeze in the shares, thinking the refinancing would give the company a new lease on life.

Shares rose from a closing low of $0.52 on October 16 to an intermediate closing peak of $3.62 on October 21 — a near 600% rally in just three sessions. That propelled shares to well above where they were trading before these refinancing plans were announced. But the true frenzied zenith for Beyond Meat came the next session, when the stock more than doubled intraday on what were then record volumes of above 2 billion, only to ultimately close slightly lower. The air came out of the balloon almost immediately thereafter.

(A fun aside: in calculating the conversion rate for the 2030 convertible notes, management deems that day to have been a “market disruption event,” which removes it from the calculations and makes the conversion price lower than it otherwise would have been.)

Shares tanked on October 23 on heavy volumes, and then interest and trading activity in Beyond continued to wane — along with its share price. Delaying the release of Q3 results as management tried to figure out how big of a write-down to take and then issuing those numbers along with a weak Q4 sales outlook did nothing to change the narrative.

There’s no reason to think those 2030 notes will be converted any time soon, based on where the stock is trading. Because these 2030 notes provide the opportunity for “payment in kind” and Beyond is in a relatively stressed financial position, interest on these notes can be paid not just with cash but also (more likely) through the issuance of more stock or the accumulation of more debt.

In sum: Beyond Meat eliminated about $800 million in debt and all it got in exchange was a 67% decline in its stock price, a longer runway to make processed peas into faux meat, and an entertaining (and for those who bought into the meme rally without exiting at the right time, painful) story.