JPMorgan Warns of Lack of Factors for AI Stocks Recovery

JPMorgan warns: the AI sector lacks the fuel for a rebound similar to July's. In the October 14 report on capital flows and liquidity, the Global Markets Strategy team led by Nikolaos Panigirtzoglou argues that the conditions that supported the summer recovery of AI infrastructure stocks are currently absent. Without them, a quick turnaround is unlikely.

To understand the warning, it is worth going back to July: the PHLX Semiconductor Index (SOX) fell by 21% – the worst month since October 2008. JPMorgan attributes this to several reasons: investors were exiting overcrowded AI positions, concerns about capital expenditures were mounting, and tech-oriented hedge funds were forced to reduce leverage, with their TMT strategies losing more than 10%.

At that time, the decline did not spiral: retail investors were buying the dip, and short sellers were rushing to close bets, temporarily pushing prices up. According to JPMorgan, this cushion is absent in mid-October. The analysis highlights three missing elements. First, retail investors have not returned with summer enthusiasm. Second, corporate buyback programs have halted, removing a steady source of demand for stocks. Third, short interest is low – this limits the potential for a short squeeze, as there are few willing to bet against the market who would be forced to buy.

Strategists also point to the dynamics of leveraged ETFs and overall market positioning as factors that increase the risk of further decline. Meanwhile, the cost of data center debt has become a sore point amid rising rates: JPMorgan points to the widening of credit default swap spreads for major names such as Oracle and SoftBank.

The current sell-off has hit South Korean memory manufacturers particularly hard – the country's main index, KOSPI, has sharply declined. JPMorgan also notes a structural shift in who is moving these stocks: since July, hedge fund involvement in AI infrastructure has decreased, leaving the segment more sensitive to retail options and margin activity. The big narrative is also changing: the market's focus has shifted from how much companies are spending on AI to whether it is making money – and this shift creates long-term competitive pressure on software companies.

The key takeaway from JPMorgan is about mechanics, not fundamentals: the basic promise of AI remains, but short-term market behavior points to a more cautious path for tech stocks. For traders, the July scenario of "buy the dip and wait for shorts to close" looks less reliable. For long-term investors, the research advises monitoring funding indicators: the cost of data center debt, credit spreads, and operating cash flows.