The Zhitong Finance App learned that J.P. Morgan Chase warned in the latest “Capital Flow and Liquidity” report released on October 14 that although stocks related to artificial intelligence (AI) infrastructure have recently shown a clear correction, compared with the adjustments at the end of July this year, the current market environment is even more unfavorable. Factors such as retail investors' lack of will to actively bottom out, corporate stock repurchases coming to an end, low short positions, and a high level of leveraged ETF size may cause AI-related stocks to continue to face downward pressure.
The J.P. Morgan Strategy Team, led by Nikolaos Panigirtzoglou, pointed out that the recent adjustments in AI infrastructure stocks were mainly led by South Korean memory chip companies, and the trend is quite similar to the pullback at the end of July this year. However, there was a clear difference in capital flow and market position structure behind the two rounds of adjustments.
First, retail investors' willingness to go undercover has clearly weakened. J.P. Morgan pointed out that during the decline in the Korean stock market in July this year, investors actively bought Korean stocks through leveraged and unleveraged exchange-traded funds (ETFs) to provide support for the subsequent market rebound.
In contrast, since entering October, purchases of Korean stock ETFs have been relatively limited. Although some overseas investors have increased their exposure through leveraged ETFs, and local investors have also bought some non-leveraged ETFs, overall, there has been no obvious buying behavior on dips like in July.
Notably, although global equity funds as a whole maintained a net inflow of capital, these funds did not clearly translate into bottom-up demand for AI infrastructure stocks.
Second, the current market lacks sufficient momentum for bears to make up. According to the report, in July of this year, the circulation share of the South Korean stock ETF iShares MSCI Korea ETF (EWY.US), which was listed in the US, once increased by about 30%, but quite a bit of this increase was related to an increase in short positions.
As the market stabilized later, bears' recovery became an important force driving South Korean stocks to rebound in August. However, since October of this year, EWY's short positions have not changed much, which means that the current market lacks similar demand to make up short positions, and it is difficult to rely on concentrated short positions to drive a rapid rebound in stock prices.
This phenomenon also appears in US memory chips and semiconductor-related assets. J.P. Morgan notes that short positions in US storage-related stocks such as Micron Technology (MU.US), SNDK.US (SNDK.US), Western Digital (WDC.US), and Seagate (STX.US) are at a relatively low level, while short positions in Vaneck Semiconductor ETF (SMH.US) and Roundhill Memory ETF (DRAM.US) are also low.
Meanwhile, short positions in the SPDR S&P 500 ETF (SPY.US), which tracks the S&P 500 index, also remained low. J.P. Morgan believes that insufficient short positions mean that once the market stabilizes, additional purchases that can be made up through short positions are relatively limited. This is also a potential vulnerability facing the current stock market.
Third, the size of leveraged ETFs has expanded since the end of July, which may increase market volatility. The report shows that after bottoming out at the end of July this year, the asset management scale of leveraged stock ETFs compared to the total market value of the underlying stock rose again in August and September. At present, this ratio has recovered to about 70% between the April low and June high this year, indicating that the relative size of leveraged ETFs is significantly higher than at the end of July.
J.P. Morgan notes that this change has made the current market more susceptible to leveraged capital position adjustments. As stock prices continue to fall, leveraged ETF rebalancing transactions to maintain target leverage levels may further amplify short-term market fluctuations.
Fourth, stock buyback support for major South Korean memory chip companies is about to weaken. According to the report, two major South Korean memory chip companies previously announced that they will implement stock repurchase plans totaling about 40 billion US dollars starting August 20, 2026. These repurchases were originally scheduled to last until November, but due to the accelerated implementation schedule, they are expected to be completed ahead of schedule in mid-October. This means that important purchases that have supported related stocks for some time in the past are about to disappear.
The bank stressed that when the market was adjusted at the end of July this year, there was no similar sudden decline in repurchase capital, so the current technical environment facing AI infrastructure stocks is even more unfavorable.
Taken together, J.P. Morgan believes that insufficient demand from retail investors, lack of room to make up for large-scale shorts, high exposure to leveraged ETFs, and the imminent decline in corporate repurchase capital, make the current short-term risk of AI infrastructure stocks higher than at the end of July. However, the bank also pointed out that despite the fragility of short-term capital and position structures, the fundamentals of the AI and technology industry are still expected to provide support in the medium to long term, so it is inappropriate to equate short-term market adjustments with a reversal of the industry's long-term growth logic.
In addition to AI-related stocks, J.P. Morgan also issued a warning about the future of US cyclical stocks, believing that the recent pullback has not brought them into a state of significant oversold status. The report points out that over the past month or two, the Russell 2000 Index and the cyclical sector have continued to outperform the market, causing the market to worry about a slowdown in US economic growth and the risk of recession.
According to J.P. Morgan's estimates as of October 12, the probability of a recession in the US economy implied by the price of the Russell 2000 index is about 28%, and the probability of recession implied by the performance of the cyclical sector compared to the defensive sector is about 32%.
In contrast, the probability of recession implied by the S&P 500 index is only about 1%, and the risk of recession reflected in the US investment-grade credit bonds, high-yield bonds, and US Treasury bond markets is also relatively limited. This shows that concerns about the slowdown in economic growth are mainly concentrated in small-cap stocks and traditional cyclical industries, and are not yet fully reflected in the pricing of large stocks and other major asset classes.
The bank further analyzed that although the level of positions held in the cyclical sector compared to the defensive sector has declined since mid-August, the overall arrangement has not changed to a short position. Meanwhile, the flow of funds from cyclical sector ETFs has gradually weakened compared to defensive sectors since mid-2026, and this trend has shown signs of accelerating in recent weeks.
However, whether judging from investors' holdings, capital flow, or relative stock price performance, cyclical stocks have not reached a significant level of oversold at present.
J.P. Morgan believes that this means that cyclical stocks are still in a difficult stage, and subsequent downside risks cannot be ignored. The bank pointed out that if cyclical stocks are to continue to rebound and push the rise in US stocks to spread from a few tech giants to a wider range of industries, it may be necessary to improve several conditions simultaneously, including falling bond yields, maintaining strong corporate profits, and gradual fading of signs of weakness in the labor market. But at the same time, economic improvements cannot push up inflation any further, so as not to force the Federal Reserve to take more aggressive measures to raise interest rates.