J.P. Morgan Warns Investors May Be Losing Momentum After Strong Rally
Taken together, J.P. Morgan sees a “less favorable equity flow and positioning backdrop” heading into the summer.
Quick overview
- J.P. Morgan warns that the recent surge in retail stock buying may be losing momentum, potentially limiting further gains for U.S. equities.
- The bank noted signs of slowing retail activity in May, following a strong rally driven by leveraged equity ETFs.
- Challenges in hedging currency exposure and elevated costs for bond investors add to the cautious outlook.
- Enthusiasm for the 'devaluation trade' involving assets like gold and bitcoin has also begun to fade.
J.P. Morgan has cautioned investors that the recent surge in retail stock buying may be losing momentum—potentially capping further gains for U.S. equities.
In a recent note, the bank highlighted signs of slowing retail activity following a strong rally. “After two strong months, retail momentum appears to have slowed in May,” analysts wrote, referring to capital flows into equities, including leveraged and inverse ETFs. The firm noted that the previous rally was “driven by leveraged equity ETFs,” as retail investors embraced a “buy-the-dip” mentality.
“A slowdown in retail momentum, higher equity exposure among equity-focused hedge funds, near-complete short-covering by macro hedge funds, and a continued lack of foreign investor buying collectively suggest limited further upside for U.S. equities,” J.P. Morgan warned.
Beyond equity flows, the bank also pointed to challenges investors face in hedging currency exposure. “Raising dollar hedge ratios is not straightforward,” analysts explained. While equity investors might view FX risk as a potential diversifier, bond investors face “elevated” hedging costs.
Devaluation Trade Losing Steam
J.P. Morgan also noted that enthusiasm around the so-called “devaluation trade”—which includes assets like gold and bitcoin—has started to fade.
“After rising significantly in Q4 2024, the overall devaluation trade has stalled this year, becoming more of a zero-sum game between gold and bitcoin,” the report stated.
Taken together, J.P. Morgan sees a “less favorable equity flow and positioning backdrop” heading into the summer.
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