Bets on a stock decline are on the rise. Why could Anthropic's IPO trigger an AI rally?

The recent decline in risk appetite on Wall Street may have set the stage for a sharp rebound in the stock market, particularly in tech stocks, according to Bloomberg, citing data from Goldman Sachs and Deutsche Bank. The initial public offering (IPO) of artificial intelligence developer Anthropic could be a driver of growth if it reignites investor interest in AI.

At the same time, hedge funds are increasingly betting on falling stock prices. If stock prices begin to rise, short sellers will have to close their short positions by buying back shares on the market. This will create additional demand and could further fuel the rise in stock prices—resulting in what is known as a short squeeze, the agency notes.

According to Deutsche Bank, investors have reduced their equity holdings to levels generally in line with historical averages. Portfolio managers who make their own investment decisions have lowered the share of U.S. stocks in their portfolios to a more than one-month low. Funds using algorithmic strategies have also reduced their positions. This leaves room for new purchases if investor confidence recovers, Bloomberg notes.

Moreover, hedge funds are increasingly betting on falling stock prices. According to Goldman Sachs, in October, hedge funds—the bank’s clients—short-sold stocks worth five times as much as they bought: for every $1 in purchases, there were about $5 in bets on falling prices. At the same time, the amount of borrowed funds that hedge funds use to bet on falling stock prices has approached the highest level in the bank’s five-year history of tracking this data.

Such bets could further fuel the rally if stock prices begin to rise, Bloomberg notes. In that case, investors who were counting on a decline in prices will have to buy back shares to close out their short positions. In the market, this situation is known as a short squeeze.

“Investors were rebalancing their portfolios as the dominance of technology and semiconductor companies came into question. We’ve reached a point where investors simply need confirmation that the AI growth story is still unfolding as planned,” Joe Gilbert, portfolio manager at Integrity Asset Management, told Bloomberg. “Once earnings season wraps up, Anthropic’s IPO will be a crucial test for the markets. “As with the SpaceX IPO, investors will be eager to gain access to shares of this one-of-a-kind unicorn—at least until OpenAI goes public. We believe demand will be high.”

Retail investors may be helping to drive the market’s recovery. From late August through early October, they were unusually active in buying options that profit from rising stock prices, compared with options designed to profit from falling prices, according to Bloomberg. Over the past two weeks, this activity has slowed, but it still exceeds average levels. This suggests that retail investors may still have room for further buying, the agency notes.

"We believe this indicates that private investors have opportunities to further increase their investments in AI-related stocks," Bloomberg quotes John Marshall, a partner at the investment firm Carrick Lane, as saying.

Shares of U.S. technology companies fell for two consecutive weeks amid investor concerns about the return on massive investments in artificial intelligence and the growing debt burden of AI companies. For example, during the week of October 12–16, the Nasdaq Composite technology index lost 4.5%, and another 0.7% the following week. Meanwhile, the Philadelphia Semiconductor Index fell by 11.4% and 3.2%, respectively.

The October 26 release of the IPO prospectus for artificial intelligence developer Anthropic temporarily halted the sell-off and reignited investor interest in the tech sector. Over the course of three trading sessions, the Nasdaq Composite gained 2.3%. However, as early as October 29, the tech sector came under pressure again due to a plunge in Alphabet’s stock following its quarterly earnings report: investors were once again concerned about the massive expenses related to AI development and the negative free cash flow of Google’s parent company.

This article was AI-translated and verified by a human editor