It's not "foreign capital smashing the market," but hedge funds that truly crushed the U.S. stock market

JP Morgan's research found that the current sell-off in the US stock market is largely driven by hedge funds (especially equity-related hedge funds) significantly reducing their risk exposure. In contrast, there is almost no evidence that foreign investors are massively selling US stocks, and domestic retail investors in the US continue to buy stocks.

Analyst Nikolaos Panigirtzoglou from the institution pointed out in the latest report that the net outflow of foreign capital from US stocks does not in itself indicate that US stocks will experience negative returns or perform poorly relative to non-US stocks, especially when domestic investors, particularly retail investors, continue to buy. At the same time, the future trend of the US stock market will largely depend on whether the US truly enters an economic recession.

What Really Weighs Down US Stocks is Hedge Funds

JP Morgan pointed out a question in its latest research report—since mid-February, the adjustment of US stocks and their poor performance relative to other global markets have raised questions in the market about "who is selling US stocks" and "whether there is foreign capital withdrawing." The data cited in the report shows that there is currently almost no evidence that foreign capital is massively selling US stocks or US bonds.

According to data from the US Treasury on international capital flows, foreign capital purchased about $24 billion of US stocks in February, far exceeding the outflow of $13 billion in January, while foreign capital also bought about $120 billion of US bonds. Japanese data also shows that after a slight net sell-off of $5 billion in February, Japanese investors bought $13 billion and $14 billion of foreign stocks in March and early April, respectively.

"We believe that most of the sell-off in US stocks this year has been driven by hedge funds focused on equities, including quantitative and discretionary long-short equity funds," JP Morgan pointed out in the report, rather than foreign capital dumping.

JP Morgan estimates that these investors have sold about $750 billion in stocks this year. Another key driving factor is momentum-following hedge funds, such as CTAs, which are liquidating long positions held since mid-February and shifting to short positions by early April, with estimated sales of about $450 billion.

The report noted:

This impulse to sell by hedge funds is also evident in US stock index futures, particularly in S&P 500 and Nasdaq 100 futures contracts.

Additionally, short interest in the S&P 500 ETF has significantly increased since early 2025, and short interest in small-cap stocks within the S&P index has also risen significantly, indicating that hedge funds have played a key role in the adjustment of the US stock market

"We believe that part of the reason hedge funds have sold U.S. stocks year-to-date (but clearly not all) is the rotation into European and Chinese stocks. However, the majority of hedge funds' selling of U.S. stocks this year may reflect a large-scale reduction in risk exposure rather than a rotation into stocks in other regions," the report noted.

Foreign capital inflows have been unstable, and retail investors are the key support for U.S. stocks

In contrast to hedge funds, U.S. retail investors continue to purchase U.S. stock ETFs, with monthly net purchases consistently around $50 billion, showing almost no interruption. However, relative to assets under management (AUM), the most significant purchases this year have been in European stock ETFs (13% of AUM) and gold ETFs (18% of AUM).

JP Morgan's report pointed out that the continued buying by retail investors is an important support factor for the U.S. stock market.

Historically, as the world's primary reserve currency, the U.S. dollar has seen foreign capital long-term investing savings in the U.S., with the share of U.S. corporate stocks held by foreign capital also on the rise. However, foreign capital inflows have been quite unstable, with outflows occurring in 2013, 2015-2016, 2019, and 2021/22. Analysts emphasized:

Even if international investors begin to sell U.S. stocks, if domestic investors, especially retail investors, continue to buy, this in itself does not mean that U.S. stocks will perform poorly.

Based on data from the past decade or so, the average outflow of foreign capital from U.S. stocks is about 0.3% of outstanding shares or 0.7% of U.S. GDP, which is approximately $200 billion to $300 billion.

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