According to a research report sent to clients on Tuesday by Wall Street financial giant JPMorgan Chase (JPM.US), global hedge funds, often referred to as "smart money," purchased shares of the largest U.S. technology giants and SaaS software stocks considered vulnerable to cutting-edge AI technology last week. This suggests the Nasdaq 100 Index, a key indicator for tech stocks, may be poised for a short-term rebound after a near one-month correction. Following a significant rally in the U.S. stock super bull market since 2023, the seven largest U.S. tech giants by market capitalization, including Alphabet, Microsoft, Amazon.com, and NVIDIA, have experienced substantial stock price declines this year. The primary reason is investor skepticism over whether massive ongoing investments in AI computing infrastructure—projected to surge 60% to potentially over $700 billion this year for the top four U.S. tech firms—will yield sufficiently strong returns to justify their high valuations.
The so-called "Magnificent Seven" (Mag 7), which includes Apple, Microsoft, Alphabet, Tesla Motors, NVIDIA, Amazon.com, and Meta Platforms, Inc., carry heavy weightings in the S&P 500 and Nasdaq 100 indices (approximately 35%-40%). They have been the core drivers behind the S&P 500's repeated record highs and are viewed by top Wall Street investment firms as the portfolio most capable of delivering substantial returns amid the largest technological transformation since the internet era.
"Although the hedge fund positioning gap between semiconductors and software remains extremely extreme and stretched from a global, U.S., and European perspective, this rotation appears to have slowed or seen some reversal," the JPMorgan report indicated. The firm noted that after record-scale selling the prior week, U.S. software stocks did see some net buying activity return, though it did not specify a precise timeframe for this comparison.
A separate client investment note from another Wall Street giant, Goldman Sachs, showed that hedge fund leverage ratios increased in the week ending February 14, approaching their highest levels in a year. Simultaneously, the rise in leverage among funds focused on leveraged strategies often implies that any significant macroeconomic, tariff, or geopolitical "noise" could trigger steeper pullbacks. The note stated that global equity markets witnessed the highest level of net selling for the week ending February 19 since U.S. President Donald Trump announced a series of import tariffs last April.
Surprisingly for investors, the financial sector saw the highest net selling in the U.S. market, while traditional defensive safe-haven sectors like energy, healthcare, and consumer staples recorded the largest net buying, according to Goldman Sachs. The firm did not, however, break down the financial sector into sub-categories.
After several consecutive weeks of deleveraging and selling, hedge funds are showing initial signals of "marginal repositioning"—buying back both large-cap tech giants and software stocks previously battered by the narrative of AI disruption. JPMorgan itself emphasized that positioning between semiconductors and software remains "very extreme/stretched," but the rotation "appears to have slowed or slightly reversed."
This typical flow pattern—from overly crowded trades, to forced selling, and finally to marginal buying returning—is indeed more likely to trigger a technical rebound, especially driven by short covering, portfolio rebalancing, and mean reversion. The sharp decline in software stocks was primarily due to market fears that viral AI agent workflows, exemplified by the popularity of models like Claude and OpenClaw, could undermine the entire SaaS subscription revenue model, leading to rare, widespread selling. This selling quickly spread to insurance, real estate, trucking, and other industries perceived as labor-intensive and ripe for AI disruption, with expectations of significant profit declines.
This shift highlights that investors are rotating away from North American SaaS software stocks and high-spending AI pioneers like Microsoft and Amazon.com, favoring instead AI computing infrastructure providers with stronger pricing power. However, most analysts suggest it is premature to declare a "trend reversal for the U.S. Mag 7 and software stocks." The root causes of the current sell-off—uncertainty over returns from massive AI investments, valuation digestion, and concerns about AI eroding software business models—have not disappeared. Furthermore, the recent decline in software stocks itself carries characteristics of a "narrative shock and risk appetite contraction."
In other words, a more reasonable assessment is that a window for a short-term, oversold rebound has opened, likely driven by hedge fund activity. However, this is more probable to be a "short-term tactical recovery bounce" rather than the immediate start of a new, sustained upward trend.
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