A flows-based bullish call from one of Wall Street’s largest market makers can matter in itself, encouraging dip buying in the S&P 500 and the Nasdaq if early-October weakness appears. Tech and AI-linked names are the likeliest first beneficiaries, given Rubner’s argument that sentiment and leverage have been cut hardest there. The risk is that the call runs into a hawkish macro backdrop: with the Fed on a hiking path (but not too quickly), any oil-driven lift in inflation from the Iran war would push yields higher and test equity valuations regardless of positioning. The mid-October start of earnings season and the reopening of buyback windows into early November are the key dates traders will watch to see whether the flows Rubner expects actually arrive.
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Citadel spent September telling clients to be patient; now it says the clear-out is done, and a mix of buybacks, earnings and midterm seasonality should bring buyers back.
Summary:
- Citadel Securities is turning more constructive on US equities for Q4, saying September’s reset largely cleared excess leverage
- In mid-September, Rubner warned stocks could fall into month-end and noted a rapid souring of AI sentiment, but said he would use weakness to add core longs
- In midterm years, Q4 has averaged gains of more than 5.5% from end-September, versus just under 3% across all years
- More than half of S&P 500 weight returns to an open buyback window by 1 November, and nearly all by 8 November
- Q3 earnings begin mid-October after a Q2 season with about 33% EPS growth and the strongest upward revisions since at least 2000
- September trading was the quietest of the year, and volumes have typically risen into October
Citadel Securities is turning more constructive on US equities heading into the fourth quarter, arguing that September’s selloff did much of the work needed to clear excess leverage and set up a recovery.
Scott Rubner, the firm’s head of equity and equity-derivatives strategy, had warned in mid-September that stocks could trade lower into month-end, citing an unfavourable supply and demand picture, a weak technical backdrop and a rapid souring of sentiment toward artificial intelligence that he observed during a multi-country client roadshow. Even then, he said the setup was beginning to change, and that he was increasingly comfortable using further weakness to rebuild core long positions.
In Citadel’s latest commentary, that shift has gone further. The firm now regards the September reset as largely complete, with leverage reduced, and views any weakness early in the fourth quarter as an opportunity rather than a reason to retreat.
Rubner sets out five supports for the view. The first is seasonality: in US midterm election years, the S&P 500 has historically gained more than 5.5% on average in the fourth quarter from the end of September, compared with just under 3% across all years, with the typical midterm path turning higher soon after quarter-end.
The second is buybacks. More than half of the S&P 500 by weight is due to be back in an open buyback window by 1 November, and almost all of it by 8 November, alongside fresh authorisations announced with third-quarter results.
Third, positioning is cleaner, with leverage cut most aggressively in the parts of the market where sentiment fell furthest. Fourth, September has historically been the seasonal low point for retail buying, which tends to pick up afterwards. Fifth, earnings are returning, with third-quarter reporting starting in mid-October after a second-quarter season that delivered earnings growth of around 33% and the strongest pattern of upward revisions since at least 2000.
Activity data underlines how subdued September was. Cash-equity volumes fell to their lowest level of the year relative to their one-year average, and overall stock trading activity was running about a quarter below its June peak. Rubner noted that over the past four years, cash-equity volumes have risen around 8% on average from September to October, with options activity climbing by roughly 15% in recent years.
His case rests on flows and positioning rather than valuation, and he has framed the central question for the quarter as whether earnings and buybacks actually bring investors back into the market. The view also faces macro headwinds, including a Federal Reserve on a tightening path and inflation pressure from elevated oil prices linked to the Iran war.
Citadel has said a full fourth-quarter playbook is to follow, and mid-October earnings will provide the first test of whether the anticipated rebound in participation materialises.
This article was written by Eamonn Sheridan at investinglive.com.