JPMorgan calls capitulation after AI winners' ugliest month in four decades

JPMorgan is calling capitulation on the AI trade — and telling clients to buy. Dubravko Lakos-Bujas, the bank's head of global markets strategy, says its long momentum portfolio trailed the broader market by 11% in October. That's the worst single month in a data series stretching back to 1985, and roughly a 6-sigma move.

The Global Equity Strategy note pins the slide mostly on a rapid sell-off in AI-related stocks, driven by two worries: whether huge AI capital spending will pay off, and tighter liquidity. Hedge funds didn't stick around to find out, dumping global tech stocks at a pace of net selling not seen since 2016.

The Nasdaq 100 logged its biggest single-day drop since the pandemic during the month and finished October approximately 5.3% lower. JPMorgan's deleveraging metrics snapped back to levels last seen around what the bank calls 'Liberation Day.'

JPMorgan reads the rout as an intra-cycle deleveraging reset inside the AI supercycle rather than its end. The Relative Strength Index on the Invesco QQQ, a popular Nasdaq 100 tracking fund, slipped below 30 — the traditional line for 'oversold.'

Cloud providers kept their AI capital expenditure trends robust even as their share prices wobbled, according to the research. Other JPMorgan strategists had already flagged that a fast rebound looked limited, pointing to weaker retail buying and slower corporate buybacks.

Outside JPMorgan, some market participants have stayed optimistic on AI, treating the October slump as a necessary adjustment rather than proof the underlying story broke. The record hedge fund selling and the deleveraging reset both signal a lot of leverage leaving the system in a short window, with the bull case resting on cloud providers keeping up that spending.