The US stock market is "extremely complacent," with record levels of crowding in high beta stocks

JPMorgan warns that as the S&P 500 index hits a record high, breaking through the 6,300-point mark, the U.S. stock market is falling into a state of "extreme complacency," with the crowding in high-beta stocks reaching record levels, which could trigger a significant market correction.

Dubravko Lakos-Bujas, head of global market strategy at JPMorgan, stated that the current crowding in high-beta stocks has reached an extreme level at the 100th percentile. This crowding situation stems from the market's pricing expectations for a "Goldilocks" economic scenario, which combines economic growth resilience and expectations of Federal Reserve easing.

Analysts believe that the crowding in high-beta stocks has surged from the 25th percentile to the 100th percentile in just three months, marking the fastest pace in 30 years. This technically driven rapid ascent may not be sustainable.

Extreme Crowded Trades Reach Historical Highs

JPMorgan data shows that there have been three extreme crowded trading events this year: in January, the crowding in the momentum factor reached the 100th percentile; in April, the low volatility crowding reached the 96th percentile; and currently, the crowding in high-beta stocks has again touched the extreme level of the 100th percentile.

The speed of the current high-beta crowded trades particularly highlights the risk of a correction. Historical data indicates that the crowding level surged from the 25th percentile to the 100th percentile within three months, a speed unprecedented in the past 30 years.

Analysts believe that the crowded trading in high-beta stocks is primarily driven by three factors: the market pricing of the "Goldilocks" scenario regarding economic growth resilience and Federal Reserve easing expectations, the "TACO trade" driven by tariff fatigue effects, and institutional investors chasing more leveraged and speculative stock sectors.

This trend has led to a steady decline in short interest in high-beta stocks, with investors shifting from previously crowded defensive positions to more aggressive stock allocations.

Analysts point out that the rapid rise in this crowding level is driven more by technical factors than by fundamentals, and thus is viewed as an unsustainable trend. Meanwhile, the crowding in the momentum factor has also rebounded to the 99th percentile, and if a double correction occurs, it could have a significant impact on investors.

There are already signs of a "turning point" in the market. On Monday, the U.S. stock market's beta and momentum baskets both fell on the same day for the first time since June 10. This technical signal coincides with the market's muted reaction to important risk events, including the upcoming earnings reports from Apple, Amazon, Microsoft, and Meta this week.

However, analysts also stated that if the business cycle accelerates again, factors such as the clarification of trade agreements, the expansion of capital expenditure cycles, and more active capital market activities supported by the Federal Reserve's easing policies may sustain the continued rise of high-beta sectors.

Defensive Strategies May Resurface

The market seems to have given little risk premium to the important earnings reports scheduled for this week and events such as the deadline for Trump's tariffs. In this atmosphere of complacency, Dubravko Lakos-Bujas believes that low volatility stock strategies are becoming attractive again.

The current market environment suggests that there may be a renewed demand for defensive strategies, especially given the record levels of congestion in high-beta stocks.

The bond market is pricing in less than a 5% probability of action from the Federal Reserve at the July meeting, while the stock market still carries some risk premium regarding that meeting. The term structure of the S&P 500 index shows that the expected volatility for the week ending August 1 is only 1.0%, which is consistent with a normal non-farm payroll report week.