JPMorgan sees no forthcoming repeat of July’s swift rebound in AI stocks. Why?
Buyers are less active, major buybacks have run their course, and leverage risks have grown
AI stocks are unlikely to recover from October’s selloff as quickly or strongly as they did after July’s, JPMorgan warns / Photo: Bumble Dee / Shutterstock.com
JPMorgan does not expect AI stocks to rebound as quickly or strongly as they did after July’s selloff, MarketWatch reports. October’s price declines alone have not set the stage for a swift recovery: investors are in no hurry to buy, and there are fewer sources of support for stocks, argues Nikolaos Panigirtzoglou, a strategist at the largest U.S. bank. He highlighted four differences from July and warned that even after the latest rout, AI stocks “do not appear oversold from a positioning or flow perspective.”
Investors are in no hurry to jump back in. As in July, the first signs of the selloff emerged in South Korea: shares of memory-chip makers SK Hynix and Samsung Electronics, two major players in the AI supply chain, have fallen by almost a third over the last month. This summer, however, investors bought beaten-down Korean stocks through both unleveraged and leveraged ETFs, Panigirtzoglou notes. So far in October, there is little evidence of such demand.
Less support from short covering. In July, short interest in iShares MSCI South Korea, the largest U.S.-listed ETF tracking Korean stocks, rose significantly. This month, however, short interest in the fund has barely changed, Panigirtzoglou notes. Short interest is also low in sector ETFs, including VanEck Semiconductor, which invests in semiconductor companies, and Roundhill Memory, a fund focused on memory-chip makers. To close a short position, an investor must buy securities. JPMorgan estimates that there is less of this buying now, leaving it less able to stem price declines.
Leveraged funds have built up assets again. Panigirtzoglou compares these funds’ assets under management with the market capitalization of the memory-chip makers whose stocks they track. The larger these ETFs’ assets relative to the chipmakers’ market value, the more extreme price swings can become, according to the strategist. The ratio bottomed out at the end of July but rose again in August and September, Panigirtzoglou noted.
Major buybacks are in the rearview mirror. Following strong second-quarter results, Samsung and SK Hynix, the largest memory-chip makers, announced share buyback programs totaling $40 billion. By mid-October, both companies had completed their buybacks earlier than expected, Panigirtzoglou notes. The market has lost two major buyers: the companies themselves. There was no equivalent drop in demand in July, which could make a recovery more difficult this time, the strategist believes.
What happened in July?
Selling pressure eased in late July following Citadel’s deal with hedge fund Situational Awareness, Bloomberg reported. The latter had been forced to sell assets to meet margin calls on leveraged positions. Citadel’s purchase of most of its remaining public equity portfolio eased fears that forced selling would continue and deepen the market’s decline.
By then, assets in leveraged ETFs tied to Samsung and SK Hynix had shrunk from more than $11 billion on June 25 to $4.1 billion as of July 30. The following day, the Kospi surged 18%. “It doesn’t mean we rally back,” Calvin Yeoh, who helps manage the Merlion Fund at Blue Edge Advisors, explained. “Just means that for now the leverage unwind is mostly done.”
What's going on in the market?
Following Wednesday’s selloff, Nasdaq 100 futures were down 1.3% half an hour before the opening bell on Thursday. Even surging revenue at Anthropic and another record profit at TSMC have yet to lift sentiment, the Wall Street Journal notes. Investors are increasingly focused on how much companies earn from AI and whether their investments are paying off, according to Marc Velan of Lucerne Asset Management.
