Forces that propelled US stocks to record highs this year remain “firmly intact” after a reset in retail investors’ speculative trading, according to Citadel Securities.
“Markets are transitioning from a flow-driven environment back to one increasingly dictated by earnings, corporate demand, and the macroeconomic backdrop,” Scott Rubner, head of equity and equity derivatives strategy at the market maker, wrote in a note to clients.
Tech stocks, which helped lead the rally to all-time highs, suffered a sharp setback last month, fueled by concerns the artificial intelligence trade had run too far, too fast. The tech-heavy Nasdaq 100 dropped the most in more than a year in July, and a gauge of chipmakers posted the worst month since 2008.
Retail investors stood out last week by posting their largest week of stock selling since 2022, according to Citadel Securities data. Retail selling was concentrated in tech stocks, Rubner said.
The retail retreat lowered leveraged exchange-traded fund assets by 28% to $154 billion, Rubner said. Meanwhile, the cost of financing equity positions has dropped, indicating Wall Street trading desks are under less pressure and that demand for leverage has fallen.
A popular speculative asset class for this cohort is leveraged ETFs, which offer ramped up exposure to a specific stock.
While the “excesses” have been unwound, a recent spate of strong earnings bodes well for US stocks, with companies managing to surpass already elevated expectations, Rubner said.
“Earnings continue to surprise to the upside, valuations have become more attractive, and corporate buyback demand is set to accelerate as earnings blackout windows expire,” he noted.
“For the first time in several months, we believe investors can spend less time focused on positioning and more time focused on fundamentals,” Rubner added.
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