Zero-day options become the new favorite, Wall Street's three major institutions reach a consensus: retail investors are leading the U.S. stock market

JPMorgan Chase, Barclays, and Charles Schwab, three major Wall Street institutions, have reached the same conclusion: retail investors are currently dominating the trends in the U.S. stock market.

Barclays strategists have discovered through their proprietary Stock Frenzy Index that the proportion of stocks in the "frenzy zone" is soaring to its highest level of the year. This index is derived from options market data and better reflects the reality of retail investors' extensive use of aggressive derivative tools such as zero-day-to-expiration options.

Charles Schwab's Chief Investment Strategist Liz Ann Sonders pointed out that since the closing low on April 9, the best-performing stocks have been concentrated in unprofitable tech stocks and heavily shorted stocks, which clearly bear the "fingerprints of retail investors." Retail investors have forced institutional investors to readjust their positions, but institutions have not adopted aggressive risk-taking strategies.

JPMorgan Chase analysts believe that retail investors, along with corporate buybacks, are providing support for the market. Despite high uncertainty surrounding economic policies such as tariffs, the volatility of actual economic data—especially GDP and inflation—is diminishing, which helps to suppress market volatility.

Signs of Retail Dominance in the Options Market

The Stock Frenzy Index developed by Barclays' strategist team shows that current market sentiment is approaching its peak for the year. This index measures the proportion of stocks in the "frenzy zone," with data sourced from the options market, accurately reflecting the widespread use of zero-day-to-expiration options and other aggressive derivatives by retail investors.

Strategists noted that while individual stock prices are rising, volatility is also increasing, a dynamic characteristic of "chasing behavior." This phenomenon sharply contrasts with traditional institutional investment strategies, which typically place greater emphasis on risk management and long-term value investing.

The popularity of zero-day-to-expiration options reflects a significant shift in retail investors' risk preferences, as these products allow investors to gain high-leverage exposure with relatively small amounts of capital.

Retail Investors Forcing Institutions to Reposition

Sonders from Charles Schwab detailed the current market landscape in the Excess Returns podcast. She stated that since the introduction of relevant tariff policies in April, the best-performing stocks have primarily been concentrated in two categories: unprofitable tech stocks and those heavily shorted.

This stock selection pattern is starkly different from traditional institutional investors' strategies, reflecting more of the investment preferences and behavioral characteristics of retail investors. The active participation of retail investors has already forced institutional investors to adjust their portfolio allocations.

However, Sonders emphasized that institutional investors have not shifted to "aggressive risk-taking positions," which is also why she believes "pain trades may still have upside potential." This relatively cautious institutional attitude contrasts interestingly with the active participation of retail investors.

Decreasing Volatility Driving Fund Inflows

The JPMorgan Chase analyst team, led by Nikolaos Panigirtzoglou, has found that retail investors and corporate buyback plans are jointly providing significant support for the market. Despite considerable uncertainty in the areas of tariffs and other economic policies, the volatility of actual economic data is decreasing The improvement in the stability of GDP and inflation data helps to reduce overall market volatility. This decline in volatility, in turn, attracts more inflows from volatility-controlled funds into the stock market.

According to Barclays data, these funds, which adjust asset allocation based on market volatility, currently allocate about 55% of their funds to stocks, a significant increase from the 20% at the lowest point earlier this year. Strategists expect that under a "moderate scenario," the stock allocation ratio of these funds could further rise to 70%.

However, these funds may also adjust their exposure levels based on the August 1 tariff deadline, the Federal Open Market Committee decision on July 30, and corporate earnings performance