Three-month increase of 30%! The most popular stocks among retail investors in the U.S. outperform the S&P 500

Retail investors in the U.S. stock market are buying stocks on an unprecedented scale, with their preferred targets significantly outperforming the market. The basket of 46 favorite stocks tracked by Citigroup has risen 30% since early September, far exceeding the S&P 500's 4.3% increase during the same period.

Meanwhile, retail trading volume has surged to a historic high. Citigroup's equity trading department released a research report on Tuesday showing that retail trading activity has reached its highest level since the bank began tracking related data in 2018.

This wave of buying coincides with a renewed optimism in artificial intelligence stocks, driven by a series of corporate transactions, expectations of interest rate cuts, and hopes for earnings resilience. AI-related stocks remain at the center of retail enthusiasm, with companies like Dell receiving significant inflows of capital.

However, the surge in trading volume has also raised concerns about overcrowded positions favored by retail investors. Strategists warn that some stock momentum has become overstretched, and any adjustments in specific sectors like quantum computing could disproportionately impact broader indices.

Trading Activity Hits Historic Highs

Citigroup's trading activity data has broken the seasonal weakness pattern seen in October, with trading volume reaching the highest level since the bank began tracking data in 2018. The basket of favorite stocks tracked by Citigroup includes companies like SoFi Technologies Inc. and Riot Platforms Inc.

Other banks' data also show a significant jump in trading volume. According to JPMorgan's equity and quantitative strategist Arun Jain in a report to clients on Wednesday, retail investors accelerated their weekly stock purchases to $7 billion from October 2 to October 8, up from an average of $5.3 billion per week over the past two months.

Interactive Brokers' chief strategist Steve Sosnick stated:

"We have long believed that the stock market's rise is primarily driven by a combination of FOMO (fear of missing out) and MOMO (momentum investing). Currently, every dip is seen as a buying opportunity, and the upward trend becomes the target to chase."

AI Stocks Remain Retail Hotspot

AI-related stocks continue to be the center of retail enthusiasm. Dell recorded its largest capital inflow in nearly five months, while the "seven giants" including Tesla, Nvidia, and Meta (excluding Apple) saw significant buying, Jain noted in the report.

The options market also reflects a risk-on sentiment. According to JPMorgan data, retail gamma supply—a measure of how much investors sell options and collect premiums on short-term call and put options—surged to a historic high of $93 billion over the past seven trading days. This spike was primarily driven by growth stocks, with technology and communication stocks seeing the most significant increases.

In terms of ETFs, retail inflows reached $5.8 billion, the highest level in nearly five months. Investors also increased their positions in precious metals, including the SPDR Gold Shares ETF (GLD) and iShares Silver Trust ETF (SLV)

Quantum Computing Stocks Become Risk Points

Strategists at 22V Research analyzed the basket of stocks favored by retail investors at Goldman Sachs, which has risen about 20% since early September, and found that some stocks exhibit excessive momentum extension.

According to 22V Research strategists, this round of gains is primarily concentrated in technology stocks, which contributed 77% of the returns. Within this basket, three quantum computing stocks—Rigetti Computing Inc., D-Wave Quantum Inc., and IonQ Inc.—performed prominently, accounting for a significant portion of the overall performance of the portfolio.

Dennis DeBusschere, Chief Market Strategist at 22V Research, wrote in a report to clients on Wednesday:

"Given the concentrated contribution of these quantum computing stocks to the recent outperformance of the basket, any adjustments in these quantum stocks will have a disproportionate impact on the broader index."

He added that even minor changes in interest rates, credit spreads, or volatility could trigger a sharp decline in the basket of stocks favored by retail investors at Citigroup