Hedge Funds, Not Foreign Investors, Driving U.S. Stock Selloff – JPMorgan

The recent decline in U.S. equities appears to be largely fueled by hedge funds rather than foreign investors, according to a new analysis from JPMorgan, led by strategist Nikolaos Panigirtzoglou.

After reviewing multiple data sources—including the U.S. Treasury International Capital (TIC) data for February, the Bank of Japan’s balance of payments up to February, and the Japanese Ministry of Finance’s international transaction data through April 11—JPMorgan concluded that there is currently minimal evidence of significant equity or bond selling by foreign investors.

Instead, the bank estimates that hedge funds have offloaded approximately $750 billion worth of U.S. stocks so far this year. This figure includes sales from both quantitative and discretionary equity long/short strategies. Additionally, momentum-driven funds such as Commodity Trading Advisors (CTAs) are believed to have contributed roughly another $450 billion in stock sales.

JPMorgan analysts suggest that part of this hedge fund activity could reflect a rotation toward European and Chinese markets, but most of the selling is likely the result of a broader "de-risking" rather than a strategic shift into other regions.

Meanwhile, U.S. retail investors continue to show resilience, maintaining a steady net inflow of about $50 billion per month into U.S. equity exchange-traded funds (ETFs). JPMorgan emphasizes that historically, even if foreign investors pull back, strong domestic retail buying can prevent U.S. equities from significantly underperforming relative to global markets.

Looking ahead, JPMorgan notes that if the U.S. enters a recession, historical patterns suggest that stock prices and 10-year Treasury yields could remain range-bound for about a year. Credit spreads and the U.S. dollar, however, would likely see upward pressure.

On the other hand, if a recession is avoided, JPMorgan expects that the recent three-month trends in U.S. asset prices could potentially reverse.