Citigroup and JPMorgan Chase both call out: Betting on this year's "worst" U.S. stocks could yield short-term returns
Citigroup and JPMorgan Chase predict that as trade tensions ease, investors should aggressively buy the U.S. stocks that have fallen the most this year to gain short-term profits. Both banks are optimistic about small-cap stocks, technology hardware, and residential builders, believing that speculators who missed the rebound will seek opportunities. Although a short squeeze may occur in the short term, long-term fund managers remain cautious about small-cap stocks and companies with weak financial conditions
According to Zhitong Finance APP, as trade tensions ease, two major Wall Street banks have made the same bold prediction for the U.S. stock market—massive buying of the stocks that have fallen the most this year to quickly gain short-term profits. With the major U.S. indices having largely recovered their year-to-date losses, Citigroup and JPMorgan Chase believe that speculative buyers and traders who missed the previous rebound will start looking for opportunities to catch up before the next round of turmoil triggered by tariffs hits.
The heads of stock trading at Citigroup and JPMorgan Chase indicated that they are particularly optimistic about small-cap stocks, technology hardware stocks, and residential builders in the coming weeks, as these stocks have lagged behind the S&P 500 in the recent rally. Stuart Kaiser, the head of U.S. equity trading strategy at Citigroup, also mentioned that he favors stocks of companies with weaker financial conditions in the current environment.
Stuart Kaiser stated, "Systematic traders and discretionary investors will make significant purchases as they missed this wave. They are currently underweight and have a lot of capital available to buy these underperforming stocks." He added that the recent rise in the S&P 500 has cleared the way for commodity trading advisors (CTAs), who have significantly reduced their stock exposure in recent weeks, to re-enter the market. Additionally, traders closing short positions in the Russell 2000 index may further boost small-cap stocks in the coming weeks.
Andrew Tyler, the head of global market intelligence at JPMorgan Chase's trading division, stated that given the potential for a short squeeze in the near term, it is reasonable to buy the battered sectors (such as retail or discretionary consumer goods) through derivatives. When a short squeeze occurs, stock prices rise sharply, forcing short sellers to quickly cover their positions to stop losses, further driving up stock prices. The JPMorgan Chase team led by Andrew Tyler noted in a report, "Any round of short squeeze could drive small and mid-cap stocks to outperform the broader market."
Short-term Trends
However, with interest rates still high and economic growth slowing, long-term fund managers remain cautious about small-cap stocks and companies with weak financial conditions. Despite the market rising this week due to a temporary easing of U.S.-China trade tensions, some investors are still concerned about the potential for more friction between the two countries in the future.
Thomas Martin, a senior portfolio manager at Globalt Investments, stated, "We have not fully escaped the shadow of tariffs, so we will not buy small-cap stocks or hold the higher-risk parts of the market. This may be suitable for short-term trading, but not for those managing funds for the next few years."
After Trump won the election, small-cap stocks were among the biggest winners, as investors anticipated that his protectionist policies would benefit the sector. However, other policies he pushed (such as tightening immigration regulations) could raise labor costs and squeeze profits for companies that primarily sell domestically Nevertheless, the short-term trend is still worth paying attention to. Goldman Sachs' "Weak Balance Sheet Index," which tracks 50 heavily indebted companies, has outperformed the S&P 500 index for 7 out of the past 8 trading days, indicating that traders are shifting towards cheaper stocks.
Stuart Kaiser suggests that investors increase their long exposure to sectors that have underperformed since Trump announced the so-called "reciprocal tariffs" on April 2, including technology hardware, durable consumer goods, and companies with weak balance sheets.
Dennis Debusschere, founder of research firm 22V Research, believes that the valuation gap between higher-risk, economically sensitive companies and high-quality firms is so large that the former has greater upside potential in the short term. He stated, "Given the impact of tariffs on small-cap stocks, this sector has the greatest potential for short-term gains."
