Citadel sees potential for a Wall Street recovery by the end of the year: are the big buyers returning to the market? 💵
Citadel estimates that the US stock market could recover by the end of 2026, as some of the most significant buyer groups on Wall Street are expected to return and increase their exposure to stocks.
Scott Rubner, head of equity and equity derivatives strategy at Citadel, identifies a possible shift in the market's balance of power after a period of declines, exposure reductions, and an increase in bearish positions.
What is behind the forecast?
1. Significant correction in the indices
The Nasdaq 100 index entered its third correction, with a decline of over 10% from the peaks recorded in October,
The declines led to a reduction in exposures and a significant shift in investor positioning.
Systematic funds reduced their exposure to US stocks to the lowest level since March 31.
2. Retail investors continue to buy
Despite the market weakness, private investors continue to pour money into stocks:
Purchases totaling nearly $33 billion over 22 consecutive trading days. An average purchase pace of about $1.5 billion a day.
This is a pace about 40% higher than normal levels.
The data indicates that private investors' appetite for stocks remains significant, even during a period of declines.
3. Hedge funds are in an extreme bearish position
Bearish positions of hedge funds approached five-year record levels. Such a situation could create potential for large-scale buying in the event of gains.
The reason is a phenomenon called short covering, meaning investors who bet against the market are forced to buy back stocks to close their positions.
In the event of a recovery, closing bearish positions could add significant buying pressure to the market.
4. Corporate buyers are returning
One of the key factors in the forecast is the return of companies to share buybacks.
By November 2, companies announced record buyback authorizations of $1.5 trillion.
By November 9, the share of companies eligible to execute buybacks is expected to reach about 85%.
Buybacks reduce the number of shares in the market, generate additional demand, and can support stock prices.
5. The potential for the return of systematic funds
Systematic funds operate using quantitative models and algorithms, which increase or decrease exposure based on market conditions.
After the funds reduced exposure to low levels, a decrease in volatility and an improvement in index trends could reactivate their buying mechanisms.
In other words, a market recovery could lead not only to new buyers, but also to automated purchases on a significant scale.
Historical seasonality supports a positive scenario
History also provides a tailwind for the forecast:
In US midterm election years, the S&P 500 index recorded an average gain of about 5.6% in the fourth quarter.
The Nasdaq 100 index recorded an average gain of nearly 5% during the month of November in midterm election years. The data does not guarantee a repetition of the historical pattern, but it points to positive seasonality in the current period.
Scott Rubner of Citadel Securities:
"With the election behind us and volatility likely to normalize, there is considerable capacity for investors to rebuild risk."
Rubner added that with uncertainty fading and the return of some of the market's largest buyers, in his view, the path of least resistance for US stocks through the end of the year is upward.
What does this mean for the market? We get an interesting picture of a market that has undergone a significant process of exposure reduction, but at the same time still enjoys demand from private investors.
Now, several demand engines could operate simultaneously:
The return of corporate buybacks. The possibility of large-scale short covering.
The return of systematic funds to buying in the event of a decrease in volatility. Continued demand from retail investors.
However, it is important to remember that a recovery is not guaranteed, especially when concerns around the valuation of AI stocks still exist. Citadel's scenario is that the market could enter a period where some of the forces that put pressure on stocks will turn into demand engines.
If the big buyers return simultaneously, Wall Street could see a significant support engine toward the end of the year.