Castle Securities: The speculative enthusiasm of retail investors has cooled down, and the core logic of rising US stocks is still “intact”

The Zhitong Finance App learned that Citadel Securities (Citadel Securities) said that although speculative trading by retail investors has cooled down markedly recently, the core driving factors driving US stocks to record highs this year are still “intact,” and the market is gradually shifting from being dominated by capital flows to being driven by corporate fundamentals.

Scott Rubner, head of stock and stock derivatives strategy at Castle Securities, said in the latest report: “The market is returning from an environment driven by capital flows to a stage where corporate profits, corporate stock buybacks, and the macroeconomic environment are increasingly dominated.”

Previously, the artificial intelligence (AI) concept drove technology stocks to continue to rise and led US stocks to new highs over and over again. However, as the market worried that AI trading was overheated, technology stocks showed a clear correction last month. Among them, the Nasdaq 100 Index, which is dominated by technology stocks, recorded its biggest monthly decline in more than a year, and the semiconductor sector index recorded its worst monthly performance since 2008.

According to Castle Securities data, retail investors recorded the largest weekly net sale since 2022 last week, and the sell-off was mainly focused on technology stocks.

At the same time, the asset size of leveraged exchange-traded funds preferred by retail investors declined by 28% to US$154 billion. Rubner pointed out that this indicates a marked cooling of speculative enthusiasm in the market. Furthermore, the cost of stock financing has continued to decline recently, which also means that the financial pressure faced by the Wall Street trading department has eased, and the overall demand for leverage in the market is declining.

Leveraged ETFs have always been an important tool for retail investors to conduct high-risk transactions. Such products usually provide a single stock or index several times the return and risk exposure of the underlying asset, so they are also regarded as an important weather vane for market sentiment.

However, Rubner believes that after the “excessive speculation” accumulated in the market was released to a certain extent, the fundamentals of US stocks were healthier. The overall performance of recently released corporate earnings reports was strong. Most companies' profits exceeded the market's already high expectations, providing support for subsequent stock market trends.

He said, “Corporate profits continue to exceed expectations, and stock valuations have become more attractive. With the end of the quiet period of financial reporting, demand for share repurchases of listed companies will further accelerate.”

Rubner further pointed out that the market has now entered a new phase. “This is the first time in a few months that investors can reduce their focus on market positions and capital flows, and return more energy to corporate fundamentals.”