Citadel: U.S. stocks may face a "tactical downside window" in September, recommend selling on rallies and buying protection at low prices

Since the March low, the S&P 500 Index has accumulated a gain of approximately 22%, with an added market capitalization of about $12 trillion, but the multiple tailwinds supporting this rally are simultaneously fading.

Citadel Securities' Chief Equity and Derivatives Strategist Scott Rubner stated in his latest report that his constructive long-term view on U.S. equities remains unchanged, but the near-term risk-reward has shifted. Rubner pointed out, as we enter September, most of the earnings season tailwinds have run their course, and historically both retail and corporate buyback demand weaken significantly in this month, while the rebuilding space for systematic capital has sharply narrowed. Meanwhile, the macro event calendar is densely returning, and seasonality shows September as the weakest month of the year.

Rubner explicitly suggests that, for the first time since adjusting in July, he now leans towards “selling on strength and buying protection at low cost” instead of chasing gains. He characterizes September as a “tactical downside window,” not the start of a broader bear market inflection, and expects after this window, the market may present more constructive opportunities around mid-October.

This earnings season saw exceptionally strong performance, but its uplifting effect on the market has largely been realized. According to Rubner’s data, 93% of the S&P 500’s weight has reported results, with 88% of companies exceeding EPS estimates and the median beat at 7%; for those missing estimates, the median shortfall was only 3%.

Year-over-year earnings per share growth for the S&P 500 in Q2 was about 33%, the strongest post-recession recovery rate outside the immediate bounce-back phase, and the path of valuation correction is also the steepest since 2000.

With Nvidia’s results now out, the most important single-stock catalysts have all passed. Historically, the U.S. equity market tends to rise in the first month of earnings season, but as the announcement calendar enters a lull, momentum dissipates. Rubner highlights that corporate calendars will become sparse, removing the clearest positive summer surprise.

The two major sources of demand supporting the August rally—retail investors and corporate buybacks—are both under seasonal contraction pressure.

For retail, according to Citadel Securities platform data, August’s average daily net notional buying ranks at the 65th percentile over the past year, about 10% above average, indicating a net buying direction, but average daily total notional buying is only at the 35th percentile, or 4% below average, signaling overall low participation. More crucially, September has historically been the weakest month for retail demand, with both net notional buy percentage and directional skew at the annual trough; since 2019, on S&P 500 down days, retail’s average daily net notional buying in September is only half the monthly average, the lowest of any month.

On buybacks, Russell 3000 index constituents have authorized a cumulative $1.1 trillion year-to-date, with 67% outside the tech sector, providing vital support in August. However, with more companies entering blackout periods ahead of their Q3 results, this source will continue to dwindle. Rubner notes, the blackout window will accelerate markedly around September 12, and the largest, most stable source of structural demand in the market will gradually shrink as the month progresses.

The market is currently pricing downside protection extremely cheaply, which, in Rubner’s view, is both a risk signal and a tactical hedging opportunity.

The S&P 500’s 1-month 25-delta put/call skew has fallen to its flattest in a year, at the 1st percentile; at the end of August, the 1-month 25-delta downside protection cost dropped to its lowest since December 2024, with VIX closing at 14.4, the lowest since December 2025 except for one occasion. Small-caps, financials, regional banks, and consumer retail—the rate-sensitive segments—have particularly low implied volatility.

Single-stock volatility compression is also significant. From late March to July expiration, the average 1-month ATM implied volatility for the top 15 stocks in the Philadelphia Semiconductor Index rose from 53.0 to 77.2 over 74 trading days; it then gave back all gains in just 20 trading days, and 30 days later had fallen to 46.0, down 31.2 vol points or 40% from the peak—even lower than the starting point before the rise. Meanwhile, VVIX (volatility of volatility) is now at the 1st percentile since early 2025.

Rubner concludes that as the market enters a dense macro event period, investors are buying protection at extremely low premiums—a disconnect that itself creates an asymmetric tactical opportunity.

The space for systematic fund rebuilding that emerged after the July reset has now been largely consumed. CTA, volatility control, and risk parity strategies have all rebuilt exposure from July’s lows, with increases focused on the S&P 500 and Russell 2000, and Nasdaq exposure essentially unchanged. Rubner notes that positioning is not crowded, but the market no longer possesses the undeployed systematic buying reserves it had after July's reset.

At the same time, a significant technical event appears at quarter-end. The top 100 U.S. pension plans now have a funding ratio of about 112%, the highest since 2001. High funding ratios continuously encourage plans to de-glide and pursue portfolio immunization, creating mechanical equity sells and fixed income purchases at quarter-end. Rubner adds that with systematic equity exposure having been substantially rebuilt from July lows, and duration holdings still relatively light, the clearest systematic positioning opportunity may now be in bonds rather than equities.

Seasonal allocation demand from equity mutual funds is also tepid—since 1984, September is the lowest month of the year for equity mutual fund subscriptions, with a median inflow of about 1.79% of AUM.

September’s quarterly option expiries are huge and may trigger another technical reset. From now until September 18’s expiration, roughly $9.6 trillion of U.S. option open interest will expire, about 35% of the total; $6.2 trillion expires on September 18 alone, accounting for 23%. At the current pace, September may surpass June’s $7.7 trillion triple-witch expiry record. As option positions expire or roll, market makers’ prior long gamma hedges may dissipate, removing another buffer from the equity market.

The macro calendar has also turned significantly. Following Jackson Hole, the September 4 nonfarm payrolls, September 10 PPI, September 11 CPI, and September 16 Fed rate decision all arrive in close succession. Unlike earnings season’s raft of positive surprises, macro catalysts deliver two-way risk, and right-tail upside is much less clear.

Long-term seasonality shows that since 1928, September is the only month when the S&P 500’s probability of decline exceeds the probability of gains—a drop rate of 55%, average monthly return of -1.1%, maximum average drawdown of -4.7%, with most weakness concentrated in the latter half of the month. During midterm election years, September’s historical performance is even weaker, with an average return of -1.5% and maximum average drawdown of -6.2%. Rubner says this path closely matches his expectations: first a period of tactical weakness, then a more constructive setup by mid-October, yet not indicating a broader reversal in the equity market trend.