US Stocks Still Have Room in August: Citadel Lists '10 Reasons' to Be Bullish, But Caution for September

Scott Rubner, Chief Equity and Derivatives Strategist at Citadel Securities, released a new report on Thursday (13th), outlining 10 reasons to be bullish on US stocks in August amid ongoing macro risks and increasing market divergence.

He believes that as a round of deleveraging gradually completes, selling pressure in US equities is subsiding. Meanwhile, multiple sources of buying—corporate buybacks, passive funds, retail investors, and systematic strategies—are strengthening simultaneously. The key question the market should now focus on is shifting from 'what could go wrong' to 'who will buy at higher levels.'

Rubner believes August could become a 'return of buyers' month. Although macro risks remain and the market won't rise in a straight line, multiple signals—from earnings, valuations, leverage, retail activity, ETF flows, corporate buybacks, to market breadth, volatility, and options markets—indicate that the balance of capital flows is increasingly tilting toward bulls.

Reason 1: Earnings Significantly Beat Expectations

First, corporate fundamentals are strong. S&P 500 Q2 earnings per share (EPS) grew approximately 33%. Excluding the post-recession recovery phase, this is an exceptionally robust growth rate.

More importantly, companies aren't just exceeding already high market expectations—earnings estimates are being revised upward across the board. Rubner notes that US equities are on the 'steepest earnings upgrade path since 2000.'

As of August 9, 429 of the 503 S&P 500 constituents had reported earnings, representing about 74% of the index's weight. The message from companies is clear: earnings not only beat expectations but did so by a significant margin.

Reason 2: Stocks Hit New Highs, Yet Valuations Decline

US stocks continue to hit record highs, but not due to expanding price-to-earnings (P/E) multiples. The S&P 500's forward 12-month P/E has declined from around 23.1x in October last year to about 20.1x today—a 15% compression—primarily because earnings expectations have been upgraded faster than stock prices have risen.

Looking at other indices, the equal-weight S&P 500 trades at a forward P/E of about 17.1x, while the Nasdaq 100's forward P/E is below its 10-year average, sitting at the 11th percentile over the past year. Rubner emphasizes that the current environment is fundamentally different from 1999—today's market is supported by earnings growth, not valuation expansion.

Reason 3: Deleveraging Nears Completion; Next Phase May Be Re-Leveraging

The third bullish factor comes from market leverage. Rubner believes the global leverage reset is 'looking increasingly mature,' suggesting that the shocks from prior systematic deleveraging are largely complete, and mechanical selling pressure from rule-based strategies is shrinking.

As market volatility declines and price trends re-establish, systematic strategies such as Commodity Trading Advisors (CTAs) and risk parity will regain room to increase equity exposure. Thus, the next major wave of mechanical capital flows may not be deleveraging, but re-leveraging.

Reason 4: Retail Buying Returns

Retail investors are also returning to the market. Last week, retail investors on Citadel Securities' platform turned net buyers again, reversing the net selling seen at the end of June.

Changes in the options market are even more noteworthy. The retail call/put ratio has turned bullish for the first time since April, and bearish sentiment has dropped to its lowest level since late March.

At the same time, trading volume in broad-based ETF options has surged. The average daily contract volume this month reached 3.1 times the monthly average, setting a new historical record.

Rubner believes retail investors are re-entering the market but are still willing to pay to hedge downside risk—indicating market participation has rebounded, though confidence hasn't fully returned. The next phase to watch is whether investor psychology shifts from caution to participation and eventually to fear of missing out (FOMO).

Reason 5: Passive Flows Never Truly Left

In addition to retail, structural passive demand remains extremely strong. Year-to-date ETF net inflows are approximately $1.6 trillion—about $75 billion per day—55% higher than previous records.

July alone saw nearly $350 billion in ETF net inflows, a record for a single month. So far in 2024, four months have ranked among the top ten highest monthly net inflows in history. Rubner states bluntly: 'Structural passive buyers never left the market.'

Reason 6: Over $1 Trillion in Corporate Buybacks Reopens

Corporations themselves will also become a major source of demand. Corporate buyback windows reopened this week, with announced buyback authorizations exceeding $1 trillion—the highest level ever at this calendar point.

Seasonally, August is already one of the more active months for corporate share buybacks. Rubner expects buyback volumes to exceed new share issuance, continuously absorbing market supply.

And it's not just large tech firms buying. Nearly 70% of the largest announced buybacks this year have come from non-tech companies, suggesting the benefits of corporate buying may be more broadly distributed.

Reason 7: Chip Stock Declines Don’t Necessarily Drag Down S&P 500

Rubner believes index structure is key to understanding this year's US stock performance. Whenever the Philadelphia Semiconductor Index (SOX) dropped more than 3% in a single day this year, the S&P 500 on average fell only 0.8%—far less than the 2.4% average decline seen in similar past scenarios over the last 20 years.

Even more unusually, software stocks on average rose on those semiconductor-heavy sell-off days—the first time since 2001. This is due to index composition, weight concentration, and marginal passive fund flows.

In other words, parts of the market can experience sharp sell-offs while major indices remain resilient—both phenomena can coexist.

Reason 8: Market Breadth Expands—Rally No Longer Driven by a Few Giants

Market breadth in US equities is also improving. Over 70% of S&P 500 components now trade above their 200-day moving average—the strongest breadth since December 2023.

Meanwhile, 1-month and 3-month realized stock correlations are near historical lows. Rubner believes the combination of 'rising breadth, falling correlation, and increasing dispersion' favors active stock-picking, with growing opportunities for individual stocks to generate alpha.

Another signal: the equal-weight S&P 500 has outperformed the market-cap-weighted S&P 500 over the past year, indicating a broadening participation in the rally.

Reason 9: Low Volatility Now Fuels Buying

Declining volatility is no longer just a 'result' of rising stocks but is increasingly becoming a 'cause' of capital inflows. As 30-day and 60-day realized volatility continues to fall, systematic trading strategies can take on higher risk exposure, creating new room for accumulation and forming a positive feedback loop.

On the other hand, the extremely high implied volatility in semiconductor and memory chip stocks has begun to normalize. This month, the average 3-month at-the-money implied volatility for the top 10 SOX components in the S&P 500 has dropped nearly 20 percentage points.

Rubner notes that low volatility is no longer just a description of market conditions—it's beginning to actively change the mathematics of capital flows.

Reason 10: Options Market Begins 'Hedging Upside'

Finally, the signal Rubner watches most closely comes from the options market.

On August 4, S&P 500 call options saw the highest single-day trading volume in history—about twice the annual average and 10% higher than the previous record set in May. From July 30 to August 5, the five trading days also set a record for the highest five-day cumulative call volume on SPX.

More notably, nearly 35% of S&P 500 components showed a 3-month call skew inversion—where call implied volatility exceeds put—reaching the highest level on record.

Rubner believes this indicates investors aren't just reducing their willingness to buy downside protection; in some parts of the market, they're now willing to spend more to bet on upside potential. This behavioral shift—from 'fear of downside' to 'fear of missing out on upside'—is a significant change in market psychology.

September: Beware How Much 'Ammunition' Remains

Taken together, these 10 signals lead Rubner to believe that while the US stock market remains challenging and macro risks are real, the path forward won't be a straight-line rally. However, judging from current capital structures, the list of potential buyers is lengthening, and the balance of capital flows is increasingly tilting positive.

But this also sows the seeds for the next phase of risk. Rubner warns that as September approaches, seasonal factors turn negative and investor positioning may become crowded. If August turns into a momentum-chasing rally, the accumulated buying power could be depleted prematurely.

Therefore, Rubner poses two very different questions for the two months: In August, the key question is 'who will come back to buy?' In September, the key question becomes 'how much ammunition remains?'