Strategists at Castle Securities believe the US stock market is nearing a cyclical low, with improving market structure signaling a shift. Investors are advised to capitalize on any further pullbacks before month-end to accumulate core assets at discounted valuations.

In a client note, strategist Scott Rubner highlighted that while September weakness persists and equities may face continued pressure over the next two weeks, supply-demand dynamics are quietly turning favorable. He anticipates the previously battered artificial intelligence sector will be the first to stabilize and rebound in October, subsequently driving broader market gains.

The S&P 500 has declined roughly 1.8% so far in September, down 3.2% from its mid-August peak, with nine of the index's eleven sectors posting monthly losses. Rubner characterized this correction as "structural rotation rather than disorderly selling," a trait that lays groundwork for a potential recovery.

Wall Street remains divided on the market's near-term outlook. Bank of America strategist Savita Subramanian recently raised her year-end S&P 500 target, while prominent bull Ed Yardeni has trimmed his forecast amid rising risks.

Downside Risks Remain in September, But Positioning Window Approaches

Rubner explicitly noted that technical and supply-demand conditions remain unfavorable heading into month-end. "The supply-demand structure into month-end is still adverse, technicals are constraining equity prices, and there is still downside over the next two weeks," he wrote. "But the landscape is beginning to shift."

This assessment extends his caution from roughly three weeks ago, when he joined other market participants in warning about seasonal pressures tied to September, historically the weakest month for US stocks. He then recommended short-term tactical repositioning while maintaining a long-term bullish stance on equities.

Backtesting data from Castle Securities, dating back to 1930, shows the S&P 500 averages a decline of about 1.1% during the final two weeks of September, followed by a recovery in October, with momentum accelerating around election day. In midterm election years, the index has historically gained an average of 5.6% from the September 30 low through year-end.

AI Sector Overhang Dissipated, Tech Poised to Lead

Rubner believes the recent concentrated selloff in AI-related equities has largely worked through valuation excess in the sector, setting the stage for a rebound. The tech-heavy Nasdaq 100 has declined in five of the past seven trading sessions, dropping nearly 6% from its early June peak.

The catalyst for this AI stock correction was a sharp escalation in concerns over the technology's potential capabilities, prompting significant deleveraging in investor positioning. Rubner points out this trend is building momentum for a reversal.

"Three months ago, the risk was everyone crowded into the same trade," he wrote. "Today, the risk is everyone has moved to the same side—bearish." Such extreme consensus pessimism itself serves as a potential contrarian catalyst.

He added that technology and communication services stocks together account for roughly half of the S&P 500's total market capitalization. Once AI leadership is confirmed and broadens during earnings season, "the rebound magnitude could far exceed the initial leaders' gains."