Will the easing of trade tensions turn this year's "big losers" in the U.S. stock market into "big winners"?

As trade tensions ease, Wall Street's two major investment banks, Citigroup and JPMorgan Chase, have both issued bold predictions: the worst-performing sectors of the U.S. stock market this year are expected to rebound in the short term.

In the latest research report, Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, and JPMorgan Chase's trading team are particularly optimistic about the performance of small-cap stocks, technology hardware, and homebuilders in the coming weeks. These sectors have lagged behind the S&P 500 index in the recent market rally. Kaiser also noted that stocks of companies with weak financial conditions are also worth watching in the current environment.

Driven by Catch-Up Effect, Those Who Missed the Rebound Will Rush In

As U.S. stocks erase their year-to-date losses, Citigroup and JPMorgan Chase believe that traders and speculative buyers who missed the rebound will be eager to seek catch-up opportunities, hoping to capitalize on the rise of lagging sectors before the next round of tariff storms hits.

Kaiser stated:

Systematic traders and discretionary investors will see a significant influx of buying, as they have not fully captured this rebound, and now they are underweight with plenty of capital available to purchase these lagging sectors.

Kaiser pointed out that commodity trading advisors (CTAs) have significantly reduced their exposure to stocks in recent weeks, and the rise of the S&P 500 has created conditions for their return to the stock market.

Short Squeeze Opportunities Emerge: Short-Term Trading Strategies Surface

Kaiser also mentioned that traders closing their short positions on the Russell 2000 index could further drive up small-cap stocks in the coming weeks.

Andrew Tyler, head of global market intelligence at JPMorgan Chase's trading desk, also noted that buying into battered sectors, such as retailers or discretionary consumer goods, through derivatives could potentially trigger a short squeeze in the short term. When stock prices surge sharply while traders hold short positions, they are forced to quickly cover their stocks to cut losses, resulting in a short squeeze.

Tyler wrote in the report:

Any short squeeze could drive the performance of small and mid-cap companies to outperform the broader market.

Long-Term Investors Remain Cautious: Short-Term Trading or Long-Term Holding?

Long-term fund managers remain cautious about small-cap stocks and companies with the weakest financial conditions, citing that interest rates remain high and economic growth has slowed.

The global trade situation still carries significant uncertainty due to Trump's unpredictability. Thomas Martin, senior portfolio manager at Globalt Investments, stated:

We have not fully escaped the tariff issues, so we will not buy small-cap stocks or hold parts of the market with high risk, which may be suitable for short-term trading but not for those managing funds for the next few years.

Additionally, the Trump administration's tightening of immigration policies may drive up labor costs, squeezing domestic U.S. businesses