Citadel Securities indicates that the US market has undergone a significant technical 'reset,' with nine out of ten indicators tracked by the firm showing marked improvement. This normalization allows fundamentals to drive the market, setting a high bar for earnings season, particularly for semiconductors. July is projected to be the second-best month since January 2020 and the strongest July on record, driven by exceptional retail demand, which has seen no net-selling sessions on Citadel's equities platform this month, with daily net buying around $3.6 billion.
Corporate earnings have broadly exceeded expectations, with Q2 EPS growth at 11.4% versus an anticipated 5%, marking the strongest growth since Q2 2021. This strength, coupled with diverse participation from corporates, institutions, and retail investors, along with concentrated leadership in AI, large-cap, quality, and tech names, is expected to extend the rally through Labor Day. However, some caution is emerging, particularly in semiconductors, which have seen selling on dips, and in options, where demand for protection has increased.
Despite the overall positive outlook, Citadel Securities notes that stress is concentrated in specific sectors and factors rather than being systemic. The firm observes a rotation beneath the index surface, with gains broadening to communication services and financials, while the Nasdaq 100, technology, and semiconductors are trading below their ten-year average multiples. Leveraged ETF assets have declined 10%, from $218 billion to $198 billion, reducing the risk of mechanical rebalancing, and funding conditions have eased, with one-month spreads back to around 60 basis points above SOFR, down from a peak of 138 basis points.
However, Citadel Securities also issued a forecast that contributed to volatility by suggesting the Federal Reserve might raise interest rates, contradicting market expectations. This move, which did not materialize, was seen by some as an attempt to restore the Fed's inflation-fighting credibility. Separately, Citadel stepped in as a rescue buyer for the AI-focused hedge fund Situational Awareness after a 67% loss in July due to a selloff in AI stocks, acquiring a portion of its $16 billion public equities book.
