JP Morgan: The recent decline in US stocks is "in place," and a steady recovery is likely to follow

Recently, the U.S. stock market has experienced the fastest and most severe decline since the COVID-19 pandemic crash, with star stocks like Tesla plummeting over 50% from their historical highs, and the Nasdaq index entering oversold territory.

However, with the easing of trade wars and tariff tensions, the possibility of a ceasefire in the Russia-Ukraine conflict has resurfaced, coupled with robust U.S. economic data. Has the market already hit bottom? Is a rebound about to begin? JP Morgan's latest research report provides an optimistic forecast.

JP Morgan's Positioning Intelligence team noted in their latest report that hedge fund crowding has experienced a significant decline over the past month, nearing the worst levels of the past few years, indicating that most of the market adjustment may have been completed. Although overall leverage remains high, it has begun to gradually decrease. JP Morgan believes that the most ideal scenario for the market is a steady recovery with gradually decreasing volatility, thereby providing more room for risk adjustment.

The report also pointed out that from the perspective of net positions, the net risk of CTAs (Commodity Trading Advisors) in U.S. stocks has approached the levels of October 2023, although it remains above the lows of 2022. Hedge funds had a negative net flow in North American stocks from late January to mid-February, but it has recently turned positive, especially in large tech stocks and the software sector. Retail and ETF fund flows have shown mixed results but have not indicated large-scale selling.

Another noteworthy point is that after nearly a month of severe selling, retail investors seem undeterred. Data from Goldman Sachs' trading department shows that retail investors are rapidly returning, making significant purchases of popular stocks like Nvidia, Tesla, Netflix, and Ford. This phenomenon indicates that market sentiment is gradually warming, and investors' risk appetite is recovering.

Meanwhile, hedge fund performance has also begun to improve. According to Goldman Sachs Prime data, the return of fundamental long-short strategy hedge funds reached 0.7% on Tuesday, marking the best single-day performance in nearly three years. Although the overall performance year-to-date remains negative, the alpha has turned positive to +0.5%, demonstrating the advantages of hedge funds in asset selection and volatility management.

Despite the warming market sentiment, not everyone believes that the bottom has been confirmed.

Goldman Sachs' Lindsay Matcham pointed out that the bottom of the U.S. economy has not yet fully manifested, for the following reasons:

The impact of DOGE has not yet fully reflected in economic data (including non-farm payrolls); the bond market has not priced in a recession; the cost of downside protection remains relatively low; credit spreads are still narrow, indicating that rising borrowing costs have not yet had a significant impact on the real economy; the probability of a recession (20%) remains low