JPMorgan warned in its latest "Flows and Liquidity" report released on October 14 that although AI infrastructure-related stocks have already seen a clear pullback recently, the current market environment is more unfavorable than the correction at the end of July this year.
According to the report, factors including retail investors' lack of willingness to aggressively buy the dip, the imminent end of corporate share buybacks, low short positioning, and the relatively high scale of leveraged ETFs may keep AI-related stocks under continued downward pressure.
The JPMorgan strategy team led by Nikolaos Panigirtzoglou pointed out that the recent correction in AI infrastructure stocks was mainly led by South Korean memory chip companies, and the trend is quite similar to the late-July pullback this year. However, there are clear differences in the fund flows and market positioning structure behind the two rounds of adjustment.
First, retail investors' willingness to buy the dip has weakened noticeably. JPMorgan noted that during the South Korean stock market decline in July this year, investors actively bought South Korean stocks through leveraged and non-leveraged exchange-traded funds (ETFs), providing support for the subsequent market rebound. In contrast, since the start of October, buying in South Korean stock ETFs has been relatively limited. Although some overseas investors increased exposure through leveraged ETFs and domestic investors also bought some non-leveraged ETFs, overall there has not been the same obvious dip-buying behavior as in July. It is worth noting that although global equity funds overall still maintained net inflows, these funds did not clearly translate into dip-buying demand for AI infrastructure stocks.
Second, the market currently lacks sufficient short-covering momentum. The report noted that in July this year, the shares outstanding of the U.S.-listed South Korean stock ETF, iShares MSCI South Korea ETF (EWY.US), once grew by about 30%, but a considerable portion of that increase was related to rising short positions. As the market later stabilized, short covering became an important force driving the rebound in South Korean stocks in August. However, since the start of October this year, short positions in EWY have changed little, meaning the market now lacks similar short-covering demand and cannot rely on concentrated short unwinding to drive a rapid rebound in share prices. This phenomenon also appears in U.S. memory chip and semiconductor-related assets. JPMorgan pointed out that short positions in U.S. memory-related stocks such as Micron Technology (MU.US), SanDisk (SNDK.US), Western Digital (WDC.US), and Seagate Technology (STX.US) are at relatively low levels, while short positions in the VanEck Semiconductor ETF (SMH.US) and the Roundhill Memory ETF (DRAM.US) are also not high. At the same time, short positions in the SPDR S&P 500 ETF (SPY.US), which tracks the S&P 500 Index, also remain at a low level. JPMorgan believes that insufficient short positions mean that once the market stabilizes, the additional buying that can be generated through short covering is relatively limited, which is also a potential vulnerability currently facing the stock market.
Third, the scale of leveraged ETFs has expanded compared with the end of July, which may intensify market volatility. The report showed that after bottoming at the end of July this year, the ratio of assets under management in leveraged equity ETFs relative to the total market capitalization of underlying stocks rose again in August and September. At present, this ratio has recovered to about 70% of the level between this year's April low and June high, indicating that the relative scale of leveraged ETFs is clearly higher than at the end of July. JPMorgan pointed out that this change makes the current market more susceptible to position adjustments by leveraged funds. When stock prices continue to fall, rebalancing trades by leveraged ETFs to maintain target leverage levels may further amplify short-term market volatility.
Fourth, buyback support from large South Korean memory chip companies is about to weaken. The report noted that two large South Korean memory chip companies previously announced a share buyback plan totaling about $40 billion starting from August 20, 2026. These buybacks were originally scheduled to continue until November, but due to faster execution progress, they are expected to be completed early in mid-October. This means that an important source of buying support for related stocks in the past period is about to disappear. The bank emphasized that there was no similar sudden withdrawal of buyback funds during the market correction at the end of July this year, so the technical environment currently facing AI infrastructure stocks is more unfavorable.
Overall, JPMorgan believes that insufficient retail dip-buying demand, a lack of room for large-scale short covering, relatively high leveraged ETF exposure, and the imminent reduction in corporate buyback funds make the short-term risks for AI infrastructure stocks higher than at the end of July. However, the bank also noted that although there is fragility in short-term liquidity conditions and positioning structure, from a medium- to long-term perspective, the fundamentals of the AI and technology sectors are still expected to provide support, so short-term market adjustments should not be equated with a reversal in the industry's long-term growth logic.
In addition to AI-related stocks, JPMorgan also issued a warning on the outlook for U.S. cyclical stocks, saying the recent pullback has not yet pushed them into clearly oversold territory. The report noted that over the past one to two months, the Russell 2000 Index and cyclical sectors have continued to underperform the broader market, triggering concerns about a U.S. economic slowdown and recession risk. According to JPMorgan's estimates as of October 12, the recession probability implied by Russell 2000 Index prices is about 28%, while the recession probability implied by the performance of cyclical sectors relative to defensive sectors is about 32%. By comparison, the recession probability implied by the S&P 500 Index is only about 1%, and the recession risk reflected in the U.S. investment-grade credit, high-yield bond, and U.S. Treasury markets is also relatively limited. This indicates that concerns about an economic slowdown are mainly concentrated in small-cap stocks and traditional cyclical industries and have not yet been fully reflected in the pricing of large-cap stocks and other major asset classes.
The bank further analyzed that although since mid-August, positioning in cyclical sectors relative to defensive sectors has declined, overall it has not yet turned into a bearish allocation. At the same time, fund flows into cyclical sector ETFs have gradually weakened relative to defensive sectors since mid-2026, and this trend has shown signs of accelerating in recent weeks. However, whether looking at investor positioning, fund flows, or relative share price performance, cyclical stocks have not yet reached clearly oversold levels. JPMorgan believes this means cyclical stocks are still in a relatively difficult phase, and subsequent downside risks should not be ignored.
The bank pointed out that for cyclical stocks to achieve a sustained rebound and for the U.S. stock market rally to spread from a handful of technology giants to a broader range of industries, multiple conditions may need to improve simultaneously, including lower bond yields, strong corporate earnings, and the gradual fading of signs of labor market weakness. At the same time, however, economic improvement must not further push up inflation, so as not to force the Federal Reserve to adopt more aggressive interest rate hikes.
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