The bank's strategists say the forces that rescued chip stocks over the summer are missing this time around
JPMorgan has a message for anyone waiting for AI stocks to bounce back the way they did over the summer: don’t hold your breath.
In an October 14 report on capital flows and liquidity, the bank’s Global Markets Strategy team argued that the conditions behind July’s recovery in AI infrastructure names are currently absent. Without them, the strategists see a rapid rebound as unlikely.
The report comes from the team led by strategist Nikolaos Panigirtzoglou. It focuses on the ongoing slide in AI infrastructure stocks, with memory chips taking a particularly hard hit.
To understand the warning, you have to rewind to July. That month, the PHLX Semiconductor Index, better known as the SOX, fell 21%.
That marked the index’s worst monthly performance since October 2008.
JPMorgan’s research points to several drivers behind the July rout. Investors rotated out of AI positions that had become overcrowded, meaning too many funds were holding the same bets at the same time.
Worries about capital expenditures added to the pressure. So did forced deleveraging among tech-focused hedge funds, which lost more than 10% in their TMT strategies (technology, media and telecom).
The July decline didn’t spiral indefinitely. Retail investors stepped in to buy the dip, and short sellers rushed to close their bets, which pushed prices back up for a time.
According to JPMorgan, that cushion is largely missing in mid-October. The bank’s analysis identifies three missing pieces.
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First, retail investors have not returned with the same enthusiasm they showed over the summer. Second, corporate buyback programs have stalled, removing a steady source of demand for shares.
Third, short interest is low, which limits the potential for a squeeze, since there aren’t many bearish traders who would be forced to buy.
The strategists also flag the dynamics of leveraged ETFs and broader market positioning as factors that amplify the risk of further declines.
Meanwhile, data-center debt costs have become a sore spot as interest rates rise. JPMorgan points to widening credit default swap spreads on major names such as Oracle and SoftBank as an example.
The current sell-off has hit South Korean memory chip stocks especially hard. The KOSPI, Korea’s main equity benchmark, has seen sharp declines as a result.
JPMorgan also notes a structural change in who is driving these stocks. Since July, hedge fund engagement in AI infrastructure has diminished, leaving the segment more sensitive to swings in retail options and margin activity.
There is a bigger narrative shift underway too. The market’s focus has moved away from how much companies spend on AI and toward whether that spending is actually making money, and that shift is creating long-term competitive pressure for software companies as well.
The core takeaway from JPMorgan’s analysis is about mechanics, not fundamentals. The bank’s research suggests the underlying promise of AI remains intact, but short-term market behavior points to a more cautious path for tech equities.
For traders, the July playbook of buying the dip and waiting for shorts to cover looks less reliable this time. With low short interest and stalled buybacks, the usual sources of upward pressure are thin.
For longer-term investors, the research suggests watching financing indicators closely. Data-center debt costs, credit spreads on heavily exposed names and operating cash flows could offer clues about how resilient these companies are under pressure.
The shift toward monetization is also likely to separate winners from laggards. Companies that can show real revenue from AI investments may hold up better than those still asking investors to trust the long game.