Five tailwinds: Citadel Securities turns bullish on US stocks for Q4

A flows-based bullish call from a top Wall Street market maker can itself encourage dip buying in the S&P 500 and the Nasdaq should early-October weakness emerge. According to Rubner, tech and AI-related names are the most likely to benefit first, because sentiment and leverage have been cut most sharply there. The risk is that the call collides with a hawkish macro environment: the Fed is on a hiking path (but not too quickly), and any oil-driven inflation boost from the Iran war would lift yields and test equity valuations no matter the positioning. Traders will watch the mid-October start of earnings season and the reopening of buyback windows into early November as key dates to see if Rubner's expected flows actually materialize.

--- Citadel spent September advising clients to be patient; now the firm says the clear-out is complete and a combination of buybacks, earnings and midterm seasonality should draw buyers back.

Summary:

• Citadel Securities is becoming more positive on US equities for the fourth quarter, stating that September's reset largely eliminated excess leverage
• Rubner warned in mid-September that stocks could decline into month-end and observed a swift deterioration in AI sentiment, yet said he would employ weakness to build core long positions
• In midterm election years, the fourth quarter has historically delivered average gains exceeding 5.5% from end-September, compared to just under 3% for all years
• By November 1, more than half of the S&P 500's weight returns to an open buyback window, and nearly all by November 8
• Third-quarter earnings start in mid-October following a second-quarter season that featured about 33% EPS growth and the strongest upward revision pattern since at least 2000
• September recorded the quietest trading of the year, and volumes have historically increased into October

Citadel Securities is becoming more constructive on US equities as the fourth quarter approaches, contending that September's selloff accomplished much of the necessary work to clear excess leverage and pave the way for a recovery.

Scott Rubner, Citadel's head of equity and equity-derivatives strategy, had cautioned in mid-September that stocks could trade lower into month-end, pointing to an unfavourable supply-demand picture, a weak technical set-up and a fast deterioration in AI sentiment he witnessed on a multi-country client roadshow. Already then, he noted that the configuration was starting to shift and that he was growing more comfortable using additional weakness to rebuild core long holdings.

In the latest commentary from Citadel, that shift has extended. The firm currently considers the September reset largely finished, with leverage lowered, and regards any early fourth-quarter weakness as an opportunity rather than a cause for withdrawal.

Rubner outlines five supports for this outlook. The first is seasonality: in US midterm election years, the S&P 500 has historically risen more than 5.5% on average in the fourth quarter from end-September, versus under 3% for all years, and the typical midterm trajectory turns upward soon after the quarter ends.

The second factor is buybacks. By November 1, more than half of the S&P 500 by market weight is scheduled to re-enter an open buyback window, and nearly all by November 8, along with new authorizations announced with third-quarter results.

Third, positioning is cleaner, with leverage reduced most sharply in the market segments where sentiment dropped the most. Fourth, September has historically been the seasonal trough for retail buying, which typically increases thereafter. Fifth, earnings are making a comeback: third-quarter reporting kicks off in mid-October after a second-quarter season that generated earnings growth of about 33% and the strongest upward revision pattern since at least 2000.

Activity data highlights just how subdued September was. Cash-equity volumes dropped to their lowest of the year relative to their one-year average, and aggregate stock trading activity was about a quarter below its June peak. Rubner pointed out that over the last four years, cash-equity volumes have increased by around 8% on average from September to October, and options activity has risen by roughly 15% in recent years.

Rubner's case relies on flows and positioning, not valuation, and he has posed the quarter's central question as whether earnings and buybacks will actually lure investors back into the market. The outlook also confronts macro headwinds, such as a Federal Reserve that is tightening and inflation pressure from higher oil prices tied to the Iran war.

Citadel has indicated that a complete fourth-quarter playbook is forthcoming, and mid-October earnings will supply the first test of whether the expected rebound in participation actually materializes.