Is the Rally in Stocks Expected to Continue, or is a Sell-Off Ahead?

The surprisingly cautious positioning of hedge funds in October could become a catalyst for a year-end market rally — provided there are no negative surprises, analysts at JPMorgan suggest. According to data from the team led by Nikolaos Panigirtzoglou, the sharp drop in “equity beta” last month indicates that many funds have reduced their exposure to stocks and adopted a more conservative strategy. This coincides with growing concerns that valuations of leading AI companies have reached excessive levels.

Strategists at JPMorgan note that if no major negative news emerges, hedge funds have the potential to support the market by increasing their equity positions and taking on slightly more risk. This could create conditions for a year-end rally, especially if corporate earnings and economic data remain stable.

Despite the relative calm in the markets, volatility has not yet returned to its low summer levels. Data cited by Goldman Sachs show that the VIX index remains above its historical averages, even as stock indexes continue their upward momentum.

This suggests that beneath the surface, investors continue to price in potential risks linked to the technology sector and uncertainty surrounding the Federal Reserve’s policy.

Experts at Goldman Sachs recall that during previous “tech bubbles,” such as the one in the late 1990s, volatility remained low for an extended period before spiking sharply as market risks intensified. According to Tony Pasquariello, head of the bank’s hedge fund coverage unit, it’s not surprising that we are entering a phase of “healthier implied volatility,” and investors should consider hedging against possible short-term corrections.

Ultimately, the market picture remains mixed — on one hand, JPMorgan sees potential for a “catch-up rally” among cautious funds, while on the other, Goldman Sachs warns that the wave of optimism may be masking deeper tensions.