JPMorgan says hedge-fund equity exposure has fallen to the point where it feels confident the downside for stocks is now limited. Its strategists link hedge-fund performance to semiconductor stocks and play down fears over funding for AI "neoclouds."
After a tough few weeks for the stock market, JPMorgan feels confident the downside is now limited. The reason is that the equity exposure of hedge funds has fallen.
Chip stocks track hedge-fund performance
Global-markets strategist Nikolaos Panigirtzoglou found a close correlation between semiconductor stocks, best represented by a VanEck exchange-traded fund, and the performance of equity hedge funds.
During the semiconductor sector's upswing in the year's second quarter, the ETF and the exposure tracked each other closely. However, hedge funds operate under very tight risk limits, so when semis began to correct, forced de-risking exaggerated the drawdown.
The sector's recent decline suggests to Panigirtzoglou and his team that much of the long positioning has been unwound. That includes momentum investors, such as the commodity-trading advisers who make up a lot of daily market turnover.
JPMorgan plays down neocloud funding fears
JPMorgan's flows and liquidity note, published Wednesday, says near-term headwinds are still in place. Even so, these positioning adjustments might now contain the downside.
Funding concerns around neoclouds also get attention in the report. Neoclouds are the specialized AI infrastructure providers that rent compute for AI workloads. In JPMorgan's view, demand for compute is so high that passing increased financing costs to end customers is possible.
The strategist also doubts that a timing mismatch between capex and revenue will derail the cycle, and he gives two reasons. First, neocloud capex demand of $80 billion or so this year is a fraction of the overall $1.8 trillion in 2026. Second, the tech sector is running a financing surplus of around $400 billion this year because cash flows exceed capex.
Semiconductors are disproportionately important for risk capital
JPMorgan also highlights the growing importance of semiconductors, both in index weighting and, even more, in their consumption of risk capital. Information technology makes up 28% of the MSCI All Cap World Index, but its share of risk capital is 40%.
Within the MSCI ACWI, semiconductors make up 13% of the market-cap weighting but take up 21% of the capital available.
The Nasdaq Composite advanced 1% on Wednesday, but stock-market futures point to a pullback on Thursday.
Source: MarketWatch
Trading involves risk.
Risk Disclaimer
