Changes in investor positioning and concerns about fundamentals
“It’s not yet time to increase exposure to risk assets”
Hedge funds sold technology stocks at the fastest pace in two years on Oct. 22 (local time), according to a report. Analysts say that, amid growing concerns about returns on AI investments, investors had become excessively concentrated in AI-related stocks that drove the market in the first half of this year.
According to Bloomberg on Oct. 26, Tony Pasquariello, Goldman Sachs’ head of hedge fund coverage, said in a client memo that the sell-off in technology stocks on Oct. 22 was the fastest in nearly two years.
“The selling seems to have shaken even the market’s core positions,” Pasquariello said, adding, “It’s difficult to judge whether the capitulation has peaked.”
He said the S&P 500 had moved sideways for three months, but that did not mean the broader market had stabilized. Since the end of June, hedge funds had been reducing their gross equity exposure for several weeks as AI-related stocks underwent a correction.
The sell-off in technology stocks appears to have resulted from a combination of investor positioning and concerns about corporate fundamentals. Pasquariello said that funds had become concentrated in the AI theme during the strong rally in the first half of the year, increasing downward pressure on popular stocks when market trends shifted.
Bloomberg reported that the sell-off was also influenced by growing concerns about power availability and financing conditions as major technology companies ramped up their commitments to invest in data centers and computing infrastructure, even though their earnings and AI demand remained robust. Rising international oil prices and the U.S. midterm elections were also cited as factors weighing on investor sentiment.
The performance gap between AI-related stocks and other sectors was also pronounced. Pasquariello said a basket of S&P 500 stocks excluding those Goldman Sachs classifies as AI-related was on track to post its strongest monthly performance in three years this month.
However, he said changes in investor positioning had a considerable impact on this trend, suggesting that capital from AI-related stock sales may have shifted to other sectors.
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Pasquariello said it was not yet time to increase exposure to risk assets. “With positions in popular stocks shaken after the major indexes spent several months treading water, investors need to remain cautious for now,” he said. He added, “Even if the bull market continues, gains will be less pronounced and volatility will be higher than before.”
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