The most recent spike in US equity market volatility draws attention to a risk that JPMorgan Chase & Co. strategists have been cautioning about: "extreme crowding" in stocks that have had significant rallies this year.
The bank has identified six equities that it views as speculative growth plays and has cautioned that they are "vulnerable to a reversal" in the event of a significant macroeconomic event. Broadcom Inc., Advanced Micro Devices Inc., Expedia Group Inc., Estee Lauder Cos Inc., Invesco Ltd., and Nucor Corp. are among the companies on the list.
The bank has identified six equities that it views as speculative growth plays and has cautioned that they are "vulnerable to a reversal" in the event of a significant macroeconomic event. Broadcom Inc., Advanced Micro Devices Inc., Expedia Group Inc., Estee Lauder Cos Inc., Invesco Ltd., and Nucor Corp. are among the companies on the list.
After setting a record last week, the S&P 500 fell 1.2% on Wednesday for the fourth day in a row. Tech equities have led the selloff as investors shift out of winners, as the JPMorgan quants warned.
They said that "crowding" into the extremely risky and volatile stocks had reached the 99th percentile, a "extreme" level that investors should protect themselves from in case of a sudden decline.
According to Bram Kaplan, head of JPMorgan's Americas equity derivatives strategy, "these companies are more sensitive to shocks, leaving them at risk of sudden repricing."
In contrast to the more volatile companies, many of which are "second order speculative AI plays," he continued, "Low Vol stocks possess a more attractive risk-reward profile."
Broadcom's stock has fallen over 21% since December 10, while Advanced Micro Devices' has fallen 11%. With the exception of Expedia, which is up roughly 3%, Estee Lauder, Invesco, and Nucor are also losing money.
This year, investors searching for winners in the AI trade spread out from Big Tech companies like Microsoft Corp. and Nvidia Corp. and piled into companies they believe will profit from the AI wave.
The companies on JPMorgan's list, which it referred to as "second-order speculative AI beneficiaries," are susceptible to significant fluctuations since they must rely on debt or capital markets rather than internal development to finance expansion.
For clients who want to trade right now, Kaplan provides a straightforward formula: purchase bearish put options on speculative names and take bullish bets on less volatile stocks.
While holding long positions in duller "low volatility" mainstays like Cigna Group, Pfizer Inc., and Verizon Communications Inc., investors may want to short some of the high-momentum stocks.
Of course, it's possible that the four-day decline in these momentum stocks is just a brief rotation away from a few hot firms rather than a major shift in the market. Micron Technology Inc.'s spectacular earnings on Wednesday, which are driving AI stocks higher once more, support this criticism.
In an interview, Alexis Maubourguet, chief investment officer of the Swiss hedge fund Adapt Investment Managers, stated that "real asset owners retail investors and large institutions are the only market participants capable of moving markets beyond short-term, shallow and technical drawdowns."
"They won't be able to liquidate their positions unless there is a significant fundamental change, like a material shift in the AI narrative."
However, with investors attempting to separate winners and losers, there is a rising perception that the AI trade is no longer able to help everyone.
