Citadel Securities Bullish on U.S. Stocks! High Leverage Retreats, Rebalancing Opportunity Emerges

According to Marketwatch, Citadel Securities has turned more optimistic on U.S. equities. Its analysts believe that after recent market volatility, the previously accumulated high leverage, crowded trades, and excessive market concentration have notably eased. Combined with upward revisions in corporate earnings forecasts and an expected rebound in share buyback demand, the market is once again supported by fundamentals.

Scott Rubner, Head of Equity and Equity Derivatives Strategy at Citadel Securities, stated a month ago that the firm would not adopt a more aggressive stance until U.S. stocks underwent a meaningful technical correction.

Now, with market conditions shifting, the company believes the time to reassess entry opportunities is emerging. According to Rubner’s analysis, Citadel Securities’ more positive outlook is based on four key factors: improved corporate fundamentals, reduced market leverage, lower index concentration, and normalized volatility structure.

In a client report, Rubner stated that the long-awaited technical correction has largely been completed. The July market movement did not alter the structural bullish trend of U.S. stocks but instead restructured market positions and digested the technical overheating accumulated in the first half of the year.

First, corporate earnings have consistently exceeded expectations. The consensus forecast for second-quarter earnings growth among S&P 500 component companies has been significantly revised upward from 22.4% at the start of the earnings season to 45%. Excluding periods of rapid post-recession profit rebounds, this quarter could become one of the strongest earnings seasons on record.

While earnings remain strong, recent stock price pullbacks have made valuations more reasonable for some stocks.

As companies release earnings and share buyback quiet periods end, corporate buying is expected to re-enter the market, providing additional support for U.S. equities.

Second, the market’s deleveraging process has made clear progress.

The asset size of leveraged ETFs in the U.S. has decreased by over $60 billion from its June peak, with technology-focused leveraged ETFs shrinking by about 40% and semiconductor-related leveraged products declining by approximately 55%, weakening the incremental leverage that drove the market in the first half of the year.

Retail investor behavior is also gradually returning to normal.

Rubner noted that during recent U.S. stock rallies, retail investors have instead been trimming positions, reverting to the typical 'buy low, sell high' trading pattern, differing from earlier behavior of continuously chasing highs and increasing risk exposure.

Third, the excessive concentration in semiconductor stocks has eased. Semiconductor companies collectively lost about $1.5 trillion in market capitalization, reducing the sector’s weight in the S&P 500 index from nearly 20% to around 16%.

Rubner stated that the surface movement of major indices once masked intense internal market volatility. While large tech and semiconductor stocks declined significantly, the broader universe of individual stocks remains near all-time highs, indicating that selling pressure was concentrated in previously high-performing, crowded trades.

Market volatility structure is beginning to normalize.

Previously, hedging costs for individual stocks and sectors were abnormally high, while hedging tools for the overall market were relatively cheap, indicating an unusual divergence between stock-level and index-level volatility. After recent broad-based selling, this pricing imbalance has been corrected.

Rubner believes the recent U.S. stock correction was primarily driven by capital rotation, leverage reduction, and improved corporate fundamentals—not by deteriorating macroeconomic conditions.

Therefore, investors can reduce focus on short-term fund flows and market positioning and refocus on corporate earnings, share buyback demand, and the overall economic environment.

As a result, Citadel Securities maintains a positive outlook on the medium-term prospects for U.S. equities. Rubner noted that structural pillars such as high retail participation, continued expansion of passive investing, and corporate demand for equities remain solid.

In the firm’s view, the July market primarily completed a technical and positioning reset and has not altered the underlying structural bullish trend of U.S. stocks.