JPMorgan is urging investors to use caution when piling into the market’s hottest stocks.
The bank recently said certain “high beta” stocks are overcrowded.
Analysts said there have been several notable instances of crowding in markets this year.
With the stock market notching fresh records weekly, it’s easy for investors to get excited, but JPMorgan is warning that some of the market’s most popular high-growth stocks are looking risky.
In a note to clients this week, Dubravko Lakos-Bujas and his team discussed what they described as “extreme crowding episodes” for investors.
As they see it, crowding in the market—they flag three notable instances of overcrowding this year—has led to heightened risk, even as stocks continue to rise. The moves, they say, look unsustainable.
While the stock market is at records, Lakos-Bujas said that crowding is also nearing record levels, as investors pile into certain high beta stocks.
High beta stocks are those that see outsize moves relative to the broader market, offering bigger gains when the market is up but also more pain during declines.
The analysts provided a high beta stocks screen with a list of companies with especially high beta scores. Super Micro Computer, a tech stock at the edge of the AI trade with high interest from short sellers, topped the rankings with a beta score of 3.37.
Just behind it on JPMorgan’s lists are Coinbase Global and Palantir Technologies, two of the tech sector’s most popular high-growth stocks. Coinbase has surged recently on momentum from pro-crypto legislation, and Palantir has benefitted from government contracts, as well as enthusiasm for AI.
Leading AI chipmakers Nvidia and Broadcom are also among the highest beta stocks.
“We believe the current 100%ile crowding based on our quantitative analysis not only presents a risk for this crowded segment, but is also a red flag for the broader market implying there is rising complacency in the short term,” the report said.
They added that the speed at which the crowding has accelerated is “particularly unsustainable,” and marks the fast acceleration in overcrowding in 30 years.
“We would fade this rally in High Beta stocks as it is not supported by a bust-to-boom recovery in the business cycle/fundamentals or significant easing in monetary/fiscal policies to sustain this outperformance over multiple quarters.”
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