Wall Street’s recent risk aversion toward stocks may have created an opening for a sharp rebound, particularly in technology shares, if Anthropic PBC’s planned initial public offering reignites enthusiasm for artificial intelligence.
Investors have reduced their equities exposure to levels broadly in line with historical norms, according to Deutsche Bank. Discretionary investors have cut their exposure to US equities to the lowest in more than a month, while funds that use computer-driven trading strategies have also scaled back. That leaves room for renewed buying if confidence returns.
Hedge funds have gone further, increasingly betting that stocks will fall. Goldman Sachs Group Inc. says its hedge fund clients have sold short roughly $5 worth of stocks for every $1 in purchases this month. Hedge funds’ use of borrowed money to bet against stocks is now near its highest level in five years, according to the firm’s records.
Those bets could help fuel a rally if stocks take off, forcing investors who wagered on declines to buy shares to close out their positions.
Technology stocks have been hit especially hard, seeing their heaviest two weeks of net selling in more than a decade of Goldman records through Oct. 16. Deutsche Bank says investors have sharply reduced their technology holdings since early October, bringing them to a six-month low near levels seen during the Iran war.
The Nasdaq 100 Index has fallen 4.5% since Oct. 6 as investor sentiment deteriorated amid a challenging macro backdrop. Brent crude climbed as the war in Iran continued, fueling worries over higher inflation and elevated interest rates. At the same time, concerns about the sustainability of the AI investment boom have intensified. Comments from cloud-computing provider CoreWeave highlighted the risks of financing AI infrastructure with debt, particularly as interest rates rise.
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That retreat could make technology shares particularly sensitive to a change in sentiment. A successful Anthropic IPO could renew excitement about AI and encourage investors to return to the sector.
“Investors have been repositioning portfolios as tech and semi leadership has been challenged and we have approached levels where investors just need reassurance that the AI story is still on track,” said Joe Gilbert, portfolio manager at Integrity Asset Management. “The Anthropic IPO will be a critical test for markets once we get past earnings. Similar to the SpaceX IPO, investors will be looking for exposure to a unicorn stock that is one of one — at least until OpenAI comes public — and we believe the demand will be strong.”
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Individual investors could also help drive a rebound. From late August to early October, retail investors were buying options betting on stock gains at an unusually high rate compared with those betting on declines. That activity has slowed over the past two weeks, although it remains above average, suggesting investors may have more appetite for buying.
“We believe this shows more room for retail investors to add to the AI trade,” John Marshall, a partner at investment firm Carrick Lane, wrote.
SpaceX’s stock market debut offers an example of how a major IPO can attract individual investors. On Friday, June 12, the day the company went public, those investors bought more US stocks than they sold by the largest amount recorded in a single day on Citadel Securities’ platform. The firm handles about 35% of US-listed stock trading by individual investors. Trading in both stocks and options surged.
“There was astronomically large retail participation,” said Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities.
Still, not all investors have been pulling back and dry powder my be running short at long-only funds. Barclays data show that while hedge funds have reduced their bets on rising stock prices, traditional investment funds have continued buying US equities.
Investors have poured about $340 billion into US stock funds this year, more than three times the roughly $100 billion typically invested by this point, according to Barclays’ Stefano Pascale. Funds that actively pick stocks now hold less than 1% of their assets in cash, suggesting they have already invested much of the money available to them.
That could limit how much additional buying comes from those investors, even if enthusiasm for AI returns.
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