JPMorgan doesn't expect a quick rebound in AI stocks, as seen after the July sell-off. Why?
Buyers are less active, major buybacks have ended, and leverage risks have increased
JPMorgan warned that the recovery of AI stocks following the October sell-off is unlikely to be as rapid and strong as it was after the July sell-off / Photo: Bumble Dee / Shutterstock.com
JPMorgan does not expect AI stocks to rebound as quickly or as strongly as they did after the July sell-off, according to MarketWatch. The October price drop itself has not yet created the conditions for a rapid rebound: investors are in no hurry to buy, and there are fewer sources of support for stock prices, according to Nikolaos Panigirtzoglou, a strategist at the largest U.S. bank. He pointed out four differences from the situation in July and warned that even after the current crash, the stocks “do not appear oversold.”
Investors are in no hurry to return. As in July, the first signs of a sell-off appeared in South Korea: shares of the two largest players in the AI supply chain—memory chip manufacturers SK Hynix and Samsung Electronics—have fallen by nearly a third over the past month. However, Panigirtzoglou notes that over the summer, investors were buying up these discounted Korean stocks through conventional ETFs and leveraged funds. So far in October, there has been little evidence of such demand.
Less support from short-covering. In July, the volume of bets on a decline in the iShares MSCI South Korea—the largest U.S.-traded ETF focused on South Korean stocks—rose significantly. In October, however, the volume of bets against this fund remained virtually unchanged, notes Panigirtzoglou. The volume of short positions is also low in sector-specific ETFs: VanEck Semiconductor, which invests in semiconductor companies, and Roundhill Memory, a fund focused on memory manufacturers. To close a short position, an investor must buy the securities; however, according to JPMorgan’s assessment, such purchases are currently fewer in number, so they are less effective at stemming the decline in prices.
Leveraged funds have once again increased their assets. Panigirtzoglou compares the value of these funds’ assets to the market value of the memory manufacturers whose stocks they track. The greater the assets of such ETFs relative to the market capitalization of memory manufacturers, the more volatile price fluctuations may be, according to the strategist. The ratio hit a low at the end of July but rose again in August and September, Panigirtzoglou noted.
Major buybacks have concluded. Following strong second-quarter results, Samsung and SK Hynix, the largest memory chip manufacturers, announced $40 billion share buyback programs. By mid-October, both companies had completed their buybacks ahead of schedule, Panigirtzoglou notes. The market has lost its major buyers—the issuers themselves. There was no such drop in demand in July, so a recovery in stock prices may now prove more difficult, the strategist believes.
What Helped in July
In late July, selling pressure eased following Citadel’s deal with the Situational Awareness fund, according to Bloomberg. The latter was forced to sell assets to meet margin calls on its leveraged positions. Citadel’s purchase of most of the fund’s remaining exchange-traded portfolio eased concerns that forced selling would continue and exacerbate the market decline.
By that point, assets in leveraged ETFs tracking Samsung and SK Hynix had fallen from more than $11 billion on June 25 to $4.1 billion as of July 30. The next day, the KOSPI jumped 18%. “This doesn’t mean the market will recover. It just means that, for now, the unwinding of leveraged positions is largely complete,” explained Calvin Yeo, a co-manager of the Merlion Fund at Blue Edge Advisors.
What's Happening in the Market
Following Wednesday’s sell-off, on October 14, Nasdaq-100 futures were down 1.3% half an hour before the start of regular trading on Thursday. Even Anthropic’s revenue surge and TSMC’s latest record profit have not yet improved market sentiment, notes The Wall Street Journal. According to Mark Velan of Lucerne Asset Management, investors are increasingly interested in how much companies are earning from artificial intelligence and whether investments in it are paying off.
This article was AI-translated and verified by a human editor
