JPMorgan has identified equity hedge funds as the primary drivers behind the recent downturn in the stock market, challenging the prevailing assumption that recession fears are to blame. This week, the S&P 500 and the Nasdaq Composite both experienced significant declines, with the former down about 3% and briefly dipping into correction territory. Meanwhile, the Nasdaq Composite has lost 3% and is trading more than 12% below its December high. As economic uncertainty looms, JPMorgan highlights Microsoft as a well-positioned company to weather the consumer slowdown, offering a potential refuge for investors.
According to Nikolaos Panigirtzoglou, a strategist at JPMorgan, equity hedge funds are the most likely culprits for the market's recent struggles. In particular, Equity Quant hedge funds and Equity TMT Sector hedge funds have been identified as the two categories most responsible for the downturn. Panigirtzoglou's analysis indicated that these funds have significantly reduced their positions, contributing to the market's volatility.
"In our mind the most likely culprits are equity hedge funds and in particular two categories: Equity Quant hedge funds and Equity TMT Sector hedge funds," said Nikolaos Panigirtzoglou.
Amidst this turmoil, JPMorgan sees Microsoft as a strong contender within the Mag6 group of mega-cap companies. The tech giant is expected to face less risk in its earnings estimates compared to its peers, making it a defensive option for investors. Microsoft's robust position is further supported by a recent upgrade from D.A. Davidson to a "buy" rating, citing its ability to withstand a consumer slowdown better than most major tech companies.
"We see Microsoft as the best positioned Mag6 for a consumer slowdown, which will make it a key shelter in the storm," stated Gil Luria.
The market's current state reflects a broader reduction in exposure to major benchmarks by investment funds. JPMorgan's position proxies for the S&P 500 and Nasdaq show the lowest exposure levels since the fourth quarter. This shift underscores the declining equity beta of hedge funds in recent months.
"Provisional data of monthly reporting hedge funds… imply a big drop in the equity beta of these two types of hedge funds in February vs January pointing to position reduction," noted Nikolaos Panigirtzoglou.