Citadel Securities: The Sharp Drop in US Stocks in July Was Not the End of the Bull Market, but a "Technical Reset"! Fundamentals Regain Dominance

The US stock market has undergone a violent technical clearing, but the foundations of the structural bull market remain solid.

In its latest report, the chief strategist at Citadel Securities pointed out that the market turmoil over the past month was essentially a necessary technical reset—achieved through position rotation, deleveraging, and fundamental improvements, rather than stemming from a substantive deterioration in the macroeconomy. The firm has thus shifted to a more positive stance on the medium-term outlook for US stocks.

The report stated that multiple technical factors that previously suppressed the market have significantly receded: retail investors have significantly reduced their risk exposure, leverage levels are normalizing, market concentration has declined, and liquidity conditions are approaching a key turning point.

Meanwhile, earnings growth expectations for the S&P 500 in the second quarter have been sharply revised upward from 22.4% at the start of the earnings season to approximately 45%, with valuations also returning to more attractive levels. The report concluded that "July did not change the structural bull market, but reset it."

Citadel Securities had previously released a report on July 28 predicting a Federal Reserve rate hike that week. It later purchased a $16 billion stock portfolio from Situational Asset Management at a discount of over 10% amid the market decline, and is considered a significant force influencing the market.

Structural Shift in Retail Investor Behavior

The most notable change in the July market was a fundamental shift in the behavior patterns of retail investors.

According to Citadel Securities data, following record-high trading activity in May and June, the average daily volume of retail spot stock transactions in July fell by about 20% from the June peak, but remained at historically high levels—ranking fourth in the platform's historical records and higher than the levels seen during the rebound in January this year.

A more critical change occurred in sentiment. As AI-related stocks heavily held by retail investors continued to weaken, investors gradually shifted from buying on dips to actively reducing positions. This transition accelerated sharply in the last week of July, with net retail selling expected to set a record for the largest single-week selloff since 2022.

The report noted that retail investors experienced net outflows for four consecutive trading days, the longest continuous period of selling this year, with the average daily net nominal selling amount nearly double that of the last comparable situation (November 2025).

The sector facing the most concentrated selling pressure was technology stocks. The report showed that the net nominal selling volume by retail investors in technology stocks this week surpassed all historical records on the platform since January 2019, exceeding the previous record by more than 80%.

Within the technology sector, semiconductor and memory chip stocks bore the brunt—these were the core targets actively bought by retail investors in May and June, with the average daily net selling volume this week more than five times higher than previous records.

Significant Deleveraging and Marked Decline in Market Concentration

Accelerated retail selling drove the fastest round of deleveraging this year, significantly optimizing the overall market holding structure.

Assets under management in leveraged ETFs have shrunk by over $60 billion from their June peak, removing an important source of incremental leverage that had driven the market higher in the first half of the year. Among these, assets in technology-focused leveraged ETFs fell by about 40% from their peak, while those in semiconductor-focused ETFs plummeted by nearly 55%.

Occurring simultaneously with the contraction in leverage was a marked decline in market concentration. The combined market capitalization of semiconductor companies in the S&P 500 shrank by approximately $1.5 trillion, reducing the industry's weight in the index from nearly 20% to 16%.

At the same time, pressure in the equity financing market has significantly eased—the one-month equity financing spread narrowed from a peak of about 138 basis points above SOFR to currently around 50 basis points, indicating that leverage demand is normalizing.

Notably, broad-based indices demonstrated strong resilience during this process, effectively masking significant volatility at the individual stock level. The S&P 500 is currently only about 150 basis points below its historical high, while on an equal-weighted basis, the average individual stock is only about 1% away from its own historical high.

Volatility Landscape Being Reshaped

As leverage normalizes, the structure of market volatility is also undergoing deep changes.

For some time, implied volatility for individual stocks and industries has remained high, while extremely low implied correlation and continuous sector rotation have suppressed index-level volatility, creating an unusually wide gap between the two. This gap only began to narrow during the comprehensive decline this week.

The continued weakness in the semiconductor sector was previously often offset by rebounds in other areas of the technology sector, allowing the S&P 500 to show unusual resistance even as it experienced the largest semiconductor correction in recent years.

Data shows that when the Philadelphia Semiconductor Index (SOX) fell by more than 3% in a single day this year, the S&P 500 dropped by an average of only 0.8%, compared to an average decline of 2.4% in similar situations over the past 20 years; meanwhile, the software sector averaged positive performance during these periods, a phenomenon not seen since 2001.

The final piece yet to normalize is the implied volatility of semiconductors. Although this indicator remains in a historical premium range relative to realized volatility, it has begun to converge in recent weeks. This compression process is expected to continue, potentially improving market liquidity, reducing hedging costs, and eliminating one of the remaining technical suppressing factors in the equity market.

Fundamentals Regain Dominance, Buyback Demand Set to Accelerate

After the technical clearing, fundamentals have once again become the core driver of market pricing, and the reactivation of corporate buybacks will further provide strong support.

From an earnings perspective, performance during this earnings season far exceeded expectations. The consensus expectation for S&P 500 earnings growth in the second quarter was sharply revised upward from 22.4% at the start of the earnings season to approximately 45%, making it one of the strongest earnings seasons outside of post-recession recovery cycles.

The characteristic of this quarter was not an unusually high proportion of earnings beats, but rather corporate profits consistently and significantly surpassing already high market expectations, forming one of the steepest earnings revision paths on record.

Regarding valuation, the significant improvement in earnings combined with the stock price adjustment in July has driven a downward repricing of market valuations. The forward P/E ratio for the S&P 500 Information Technology sector is currently around 20x, close to its one-year valuation low (at the 1st percentile) and significantly below the 10-year average of 23x.

In terms of supply and demand dynamics, an important reversal window is approaching. The report estimates that currently, only about 45% of S&P 500 constituents by market capitalization can implement buybacks. As earnings quiet periods expire successively, this proportion is expected to rise to 75% by next weekend and further increase to about 85% by mid-August.

Citadel Securities pointed out that this will coincide with the current cleaned-up holding structure, creating one of the most favorable supply and demand landscapes since early summer—and August has historically been one of the most intensive months for corporate buyback execution.

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