Retail replaces ‘smart money' as the Wall Street rocket fuel
Retail investors are often late to Wall Street parties, only catching the rally once it's established and 'smart money' is looking for the exit.
But that doesn't appear to be the case this time around.
Flow and survey data showed that – far from playing catch-up – retail investors are a key force behind the latest US equity whoosh that has been lifting the S&P 500 and Nasdaq to new highs on a near-daily basis.
Retail investor participation as a share of total S&P 500 flow last week reached 12.63%, according to calculations by Goldman Sachs analysts. That's the highest share since February and well above the recent average, as retail participation has rarely exceeded 13% in the last few years, their figures showed.
Retail investors have been the 'primary' driver of the current rally, Barclays equity strategists suggest, pouring more than US$50bil into global stocks over the last month. And their enthusiasm for equities is continuing to build, while institutional participation remains 'muted', Barclays strategists noted.
'Re-risking seems to be the priority for small investors as improved sentiment into second-quarter earnings, resilient macro data and US Federal Reserve cut speculation combine to outweigh still-lingering tariff threats and deficit concerns,' they wrote last week.
This optimism was underscored in Morgan Stanley's latest quarterly survey of retail investors published last week.
It shows 62% of those polled are now bullish US equities, and 66% reckon the US market will rise by the end of the quarter.
These are both the highest levels since the survey was launched two and a half years ago.
This surge in retail activity could be a positive development.
At a basic level, broader participation and democratisation of the market is to be welcomed. And some analysts reckon the retail investor community has matured since 2021 when the 'meme stock' frenzy spilled over into the wider market.
But current retail trading still includes some of this highly speculative, often options-related meme stock activity, with the main targets this time around being heavily shorted names like Krispy Kreme, GoPro and Kohl's.
Indeed, Bank of America analysts noted, 'zero-day to expiry' options that are popular with retail investors recently accounted for more than 60% of all S&P 500 options trading activity.
And the longer the rally continues, the more fears of a major correction that crushes the retail community are bound to grow. These fears are not unwarranted.
The latest figures from the Financial Industry Regulatory Authority (Finra) show that margin debt in US stocks has crossed the US$1 trillion mark for the first time.
This represents both retail and institutional investors' activity, but according to JP Morgan analysts, the retail cohort is predominantly responsible for the rise.
Of course, investors' margin debt would be expected to rise over time in line with inflation and the underlying equity indices, particularly in a bull market.
But some analysts still consider rising margin debt a sign of market froth or outright over-exuberance.
On top of all this, retail investors may soon get a helping hand from Washington.
A series of what Bank of America analysts call 'financial regulation policy-easing' measures are being lined up that will facilitate retail investors' trading in equities and other less-liquid markets.
For example, the Trump administration is drawing up an executive order to allow retail investors to add private equity into 401K retirement funds.
Media reports also suggest Finra is considering proposals to ease the 'Pattern Day Trading Rule' – which was set up to limit highly speculative trading practices – by slashing investors' minimum margin account balance requirements to US$2,000 from US$25,000 currently.
Of course, with deregulation comes higher risk and lower protection for investors. But for now, retail investors are in the driver's seat and enjoying the ride. — Reuters
Jamie McGeever is a columnist for Reuters. The views expressed here are the writer's own.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Star
11 minutes ago
- The Star
India accuses EU, US of double standard over Russian trade
FILE PHOTO: Russian President Vladimir Putin shakes hands with Indian Prime Minister Narendra Modi during their meeting on the sidelines of the BRICS Summit in Kazan, Russia October 22, 2024. Alexander Zemlianichenko/Pool via REUTERS/File Photo NEW DELHI (Reuters) -India has sharply criticised the United States and the European Union, saying it is being unfairly singled out by them over its Russian oil purchases when they both trade extensively with Moscow despite the war in Ukraine. India's criticism followed a renewed threat by U.S. President Donald Trump on Monday to raise tariffs on goods from India over its Russian oil purchases, deepening the trade rift between the two countries. In a rare show of unity, Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) and the main opposition Congress on Tuesday condemned Trump's repeated criticism of New Delhi. India's Foreign Ministry said in a statement issued late on Monday that "it is revealing that the very nations criticising India are themselves indulging in trade with Russia". "It is unjustified to single out India," the ministry said. It said the EU conducted 67.5 billion euros ($78.02 billion) in trade with Russia in 2024, including record imports of liquefied natural gas (LNG) reaching 16.5 million metric tons. The United States, the statement said, continues to import Russian uranium hexafluoride for use in its nuclear power industry, palladium, fertilisers and chemicals. It did not give a source for the export information. The U.S. embassy and the EU's delegation in New Delhi did not immediately respond to a request for comment. Both the United States and EU have sharply scaled back their trade ties with Russia since it launched a full-scale invasion of Ukraine in February 2022. In 2021, Russia was the EU's fifth-largest trading partner, with goods exchange worth 258 billion euros, according to the EU executive European Commission. SUDDEN RIFT The sudden rift between India and the U.S. has been deepening since July 31, when Trump announced a 25% tariff on Indian goods being shipped to the U.S. and for the first time threatened unspecified penalties for buying Russian oil. India is one of the biggest buyers of crude from Russia, importing about 1.75 million barrels per day from January to June this year, up 1% from a year ago. Indian refiner Nayara Energy, a major buyer of Russian oil which is majority owned by Russian entities including oil major Rosneft, was subjected to European Union sanctions targeting Russia's oil and energy industry in July. India has said it does not support "unilateral sanctions" by the EU. Trade experts say Trump's tariff could badly hurt India's economy. Ajay Srivastava of the New Delhi-based Global Trade Research Initiative said he expected Indian goods exports to the U.S. to fall 30% in the current fiscal year ending March 31, to $60.6 billion from $86.5 billion in the 2025 fiscal year. India's equity benchmarks fell after Trump's renewed threat of harsh tariffs on goods from India. Manish Tewari, a member of parliament and Congress leader, said Trump's "disparaging remarks hurt the dignity and self-respect of Indians". "The time has come to call out this constant bullying and hectoring," he added. BJP Vice President Baijayant Jay Panda quoted Henry Kissinger - the most powerful U.S. diplomat of the Cold War era - in a post on X: "To be an enemy of America can be dangerous, but to be a friend is fatal." (Reporting by Aftab Ahmed and Nidhi Verma;Editing by Helen Popper)
The Star
11 minutes ago
- The Star
Abu Dhabi's MGX could raise up to $25 billion for AI fund, Bloomberg News says
(Reuters) -Abu Dhabi-based MGX is considering plans to raise as much as $25 billion in third-party capital as the investment group looks to ramp up its artificial intelligence holdings, Bloomberg News reported on Tuesday, citing people familiar with the matter. MGX declined to comment on the report and Reuters could not immediately verify it. Company executives are weighing raising money from financial and strategic investors in Abu Dhabi and beyond, but Mubadala Investment Co and AI firm G42 will remain MGX's main backers, the report said. No final decisions have been made, according to the report. MGX, which has invested in OpenAI and Elon Musk's xAI, is chaired by Sheikh Tahnoon bin Zayed Al Nahyan, the UAE's national security adviser and a brother of UAE President Sheikh Mohammed bin Zayed. The Financial Times reported last week that French AI startup Mistral is in talks with MGX and other investors to raise $1 billion at a valuation of $10 billion. (Reporting by Dheeraj Kumar in Bengaluru; Editing by Mrigank Dhaniwala and Devika Syamnath)
The Star
42 minutes ago
- The Star
Exclusive-Intel struggles with key manufacturing process for next PC chip, sources say
SAN FRANCISCO (Reuters) -The production process that Intel hoped would pave the way to winning manufacturing deals and restore its edge in churning out high-end, high-margin chips is facing a big hurdle on quality as it puts newer technologies to the test, two people briefed on the matter told Reuters. For months, Intel has promised investors it would increase manufacturing using a process it calls 18A. It spent billions of dollars developing 18A, including the construction or upgrades of several factories, with the goal of challenging Taiwan's chipmaking heavyweight, TSMC. Intel wants to round out its business designing chips that it largely makes in-house and TSMC helps it produce, with a contract manufacturing business that can compete with this key supplier. But whether Intel revives advanced chip production in the U.S. and gets its contract foundry on solid footing depends on closing the technology gap with TSMC. Early tests disappointed customers last year, but Intel has said its 18A is on track to make its "Panther Lake" laptop semiconductors at high volume starting in 2025, which include next-generation transistors and a more efficient way to deliver power to the chip. The chipmaker has hoped that producing such an advanced in-house chip would grow external interest in its foundry,at a time when new CEO Lip-Bu Tan has explored a major shift to course-correct that fledgling business, Reuters previously reported. Yet only a small percentage of the Panther Lake chips printed via 18A have been good enough to make available to customers, said the two people, who were briefed on the company's test data since late last year. The sources spoke on condition of anonymity because Intel did not authorize them to disclose such information. This percentage figure, known as yield, means Intel may struggle to make its high-end laptop chip profitably in the near future. Yield may inch up or down as a foundry optimizes its manufacturing process. Companies also calculate yield in a variety of ways, which can make this critical data a moving goal post, the two people and two additional sources with knowledge of Intel's manufacturing operation said. Yields generally "start off low and improve over time," Intel's Chief Financial Officer David Zinsner told Reuters in a July 24 interview. For Panther Lake, "it's early in the ramp," he said. In a statement on July 30, Intel added: "Our performance and yield trajectory gives us confidence this will be a successful launch that further strengthens Intel's position in the notebook market." Intel in the past has aimed for a yield north of 50% before ramping production because starting any earlier risked damaging its profit margin, three of the sources said. Intel typically does not make the lion's share of its profit until yields reach roughly 70% to 80%, key for a chip as small as Panther Lake where many defects would make it a tough sell, the three people said. Profit also flows from market expansions and building up factory output, Intel said. An immense yield increase would be a tall task by Panther Lake's fourth-quarter launch, the two people with knowledge of Intel's manufacturing operation said. But without such a jump, Intel may have to sell some chips at a lower profit margin or at a loss, the two sources briefed on test data said. Panther Lake is "fully on track," Intel said in its July 30 comment. Intel did not specify the yield threshold at which its chips become profitable. The company has warned it could exit leading-edge manufacturing entirely if it does not land external business for 14A, which is 18A's next-generation successor. 'HAIL MARY' Intel's 18A process involved big manufacturing changes and introduced newer technologies all at once, such as a next-generation transistor design and a feature that would improve the delivery of energy to a chip. This created manufacturing risks due to the complexity of fabricating chips, three of the sources said. Intel took on this challenge to close the performance gap with TSMC, but its aggressive timeline for a rollout of unproven systems set it up for failure, said the two people briefed on the company's test data. One likened the effort to a "Hail Mary" football pass. In April, Intel said it had begun a crucial step toward printing Panther Lake chips via 18A known as "risk production."The company also showed off several laptops it said used Panther Lake chips at the Taiwan Computex expo in May. But problems have persisted. One way chip manufacturers gauge progress is to measure the number of defects per area of a chip, which can vary based on a semiconductor's design. Relative to industry standards, the Panther Lake chips had about three times too many defects for Intel to start high-volume production, the two sources briefed on test data said. As of late last year, only around 5% of the Panther Lake chips that Intel printed were up to its specifications, these sources said. This yield figure rose to around 10% by this summer, said one of the sources, who cautioned that Intel could claim a higher number if it counted chips that did not hit every performance target. Reuters could not establish the precise yield at present. In the interview with Reuters, Zinsner disputed these figures and said "yields are better than that." He did not give a number for July or late 2024, and Intel declined to provide this data. "Our expectation is every month they'll get better and better, such that we're at a yield level that is good for production-level Panther Lake at the end of the year," he said, adding:"I wouldn't say that margins are accretive even at those yield levels, so we still have to make improvement." Tan has tapped supply-chain contacts more than usual for Intel and has given them data to help improve chip yields, Zinsner said. For now, Intel remains partly dependent on TSMC to make its in-house designed chips. An Intel executive said in June that Nova Lake, a chip it is planning after Panther Lake, will be made partly on TSMC, too. (Reporting by Max A. Cherney and Jeffrey Dastin in San Francisco; Additional reporting by Stephen Nellis; Editing by Sayantani Ghosh, Matthew Lewis and Anna Driver)
