Citadel Securities: The Sharp Decline in U.S. Stocks in July Is Not the End of the Bull Market, But a "Technical Reset"! Fundamentals Regain Dominance

The U.S. stock market has experienced a round of sharp technical correction, but the foundation of the structural bull market remains solid.

Citadel Securities’ Chief Strategist pointed out in the latest report that the market turmoil over the past month was essentially a necessary technical reset—accomplished through portfolio rotation, deleveraging, and fundamental improvements, rather than a substantial deterioration in macroeconomic conditions. The institution has thus shifted to a more positive stance on the medium-term outlook for U.S. stocks.

The report states that the various technical factors that previously suppressed the market have largely dissipated: retail investors have significantly reduced risk exposure, leverage levels are normalizing, market concentration is declining, and the liquidity situation is approaching a key turning point.

Meanwhile, the S&P 500’s Q2 earnings growth expectation has been revised sharply upward from 22.4% at the start of earnings season to about 45%, with valuations also returning to more attractive levels. The report concludes, “July did not change the structural bull market, but rather reset it.”

Previously, on July 28, Citadel Securities released a report forecasting a Fed rate hike that week, and later bought the Situational Fund’s $16 billion stock portfolio at a more than 10% discount during the market downturn, which was considered an influential market event.

The most significant change in July was a fundamental shift in the behavior of retail investors.

Citadel Securities data shows that following record-high trading activity in May and June, retail investors’ average daily spot equity volume in July slipped about 20% from June’s peak, but remained at historical highs—ranking fourth in platform history and above levels seen during the rebound in January.

The key shift was in sentiment. As AI-related stocks favored by retail investors continued to weaken, investors gradually shifted from buying the dip to proactively reducing positions. This shift accelerated sharply in the final week of July, when retail net selling was set to record the largest weekly sell-off since 2022.

The report notes that retail investors saw four consecutive trading days of net outflows, the longest selling streak so far this year, and the average nominal daily net sell-off nearly doubled compared to the last comparable period (November 2025).

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

Within the tech sector, semiconductor and memory chip stocks were hit the hardest—these were the core targets heavily bought by retail investors in May and June. This week, daily average net selling exceeded the previous record by more than five times.

The acceleration of retail selling has propelled the fastest round of deleveraging so far this year, significantly optimizing the overall market position structure.

Leveraged ETF assets have shrunk by over $60 billion since the peak in June, erasing an important source of incremental leverage that drove markets higher earlier in the year. Specifically, technology leveraged ETF assets are down about 40% from their peak, while semiconductor leveraged ETFs have plummeted almost 55%.

Simultaneous with the contraction in leverage was a noticeable decrease in market concentration. The combined market cap of semiconductor companies in the S&P 500 shrank by about $1.5 trillion, with their index weight dropping from nearly 20% to 16%.

At the same time, equity financing market pressures have also eased significantly—a one-month equity financing spread narrowed from a peak above SOFR by about 138 basis points to around 50 basis points, indicating leverage demand has normalized.

It is noteworthy that broad-based indices demonstrated considerable resilience during this process, effectively masking significant stock-specific volatility. The S&P 500 is currently only about 150 basis points below its historical high, and on an equal-weighted basis, the average stock is just about 1% below its own historical high.

As leverage returns to normal, the market’s volatility structure is also undergoing profound changes.

In recent times, implied volatility for individual stocks and sectors remained elevated, while extremely low implied correlation and continued sector rotation held down index-level volatility, creating an unusually wide gap. This gap only began to narrow amid this week’s broad-based declines.

Continued weakness in the semiconductor sector was often offset by rebounds in other tech fields, allowing the S&P 500 to demonstrate notable resilience even during the largest semiconductor correction in recent years.

Data shows that, so far this year, on days when the Philadelphia Semiconductor Index (SOX) dropped more than 3%, the S&P 500 on average fell only 0.8%. Over the past 20 years, the average drop in similar conditions was 2.4%; meanwhile, the software sector averaged positive performance during those periods—a first since 2001.

The final piece awaiting normalization is the implied volatility of semiconductors. While this metric remains at a historically high premium relative to realized volatility, it has begun to converge over the past few weeks. This compression process is expected to continue, potentially improving market liquidity, reducing hedging costs, and removing one remaining technical suppressor in the equity market.

With technical factors cleared, fundamentals have once again become the core driver of market pricing, and a reactivation of corporate buybacks is expected to provide further strong support.

From an earnings perspective, results this reporting season have exceeded expectations by a large margin. Consensus estimates for S&P 500 second-quarter earnings growth have been revised sharply higher from 22.4% at the start of earnings season to roughly 45%, making this one of the strongest reporting seasons outside major post-recession recoveries.

The main feature of this quarter is not an unusually high earnings beat rate, but rather the scale of earnings consistently exceeding already elevated market expectations, creating one of the steepest upward revision paths on record.

In terms of valuation, substantial earnings improvement coupled with the July stock price correction has pushed market valuations downward. The S&P 500 Information Technology sector’s current forward P/E is about 20x, near its one-year low (1st percentile) and significantly below the 10-year average of 23x.

Regarding capital flows, an important reversal window is approaching. The report estimates that only about 45% of the S&P 500 by market cap is currently eligible for buyback activity. As earnings blackout periods expire one by one, this percentage is expected to rise to 75% by the end of next week and to approximately 85% by mid-August.

Citadel Securities notes that this will precisely align with a now-cleaner position structure, creating one of the most favorable supply-demand dynamics since early summer—while August is historically also one of the most active months for corporate buybacks.