Citi, JPMorgan See 2025's Laggards Turning Short-Term Winners

Yahoo

14-05-2025

(Bloomberg) -- Two of Wall Street's major trading desks are making the same bold call on US stocks as trade tensions ease: Pile into this year's biggest losers for quick, short-term profits.
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Heads of equity trading at Citigroup Inc. and JPMorgan Chase & Co. say they're particularly bullish over the next few weeks on small caps, technology hardware and homebuilders, which have each lagged the broader S&P 500 Index during the most recent leg up. In the current environment, Stuart Kaiser, who runs Citigroup's desk as head of US equity trading strategy, also likes shares of companies with weaker finances, he said.
With the broader US stock indexes already erasing their declines of the year, the firms now say the traders and other speculative buyers who missed out will be on the hunt for pockets of opportunity to play catch-up before the next bout of tariff-induced turbulence strikes again.
'There will be significant buying from systematic traders and discretionary investors who haven't captured as much of this rally as they would have liked,' Kaiser said. 'Now, they're under-positioned and have a lot money to use to buy some of these laggards.'
With commodity trading advisers, or CTAs, slashing their exposure to equities in recent weeks, the run-up in the S&P 500 has cleared the path for many of them to return as buyers, he said. Traders closing out their bearish wagers in the Russell 2000 Index will also likely spur more gains for small caps in the coming weeks, he added.
Andrew Tyler, head of global market intelligence for JPMorgan's trading desk, says it makes sense to buy — via derivatives — shares of hard-hit groups like retailers or consumer discretionary on the potential for a near-term short squeeze. That squeeze occurs when a stock's price rises sharply while traders have short positions, forcing them to buy back shares quickly to cut losses.
'Any short squeeze will likely push small- and mid-capitalization companies to outperform,' the JPMorgan team led by Tyler wrote in a Monday note.
Short-Term Trend
Long-term money managers still see risks in small caps and companies with the most fragile balance sheets given that interest rates remain elevated and economic growth has slowed. While broader markets rallied so far this week because of a reprieve in US-China trade tensions, some investors remain concerned about the possibility of more friction between the two countries down the road.
'We're still not out of the woods on tariffs so we wouldn't buy small caps or own the riskier parts of the market,' said Thomas Martin, senior portfolio manager at Globalt Investments. 'That may work for a short-term trade, but it doesn't work for those managing money for the next few years.'
While small-caps were one of the biggest winners when Donald Trump won the elections — as investors expected his protectionist policies to boost the group — his other proposals, such as tough immigrant laws, can drive up labor costs and squeeze out businesses that derive most of their sales at home.
Even so, the short-term trend is telling. Goldman Sachs' weak balance sheet index, which tracks the 50 most indebted companies, has outpaced the S&P 500 in seven of the past eight sessions — evidence that traders are veering toward cheaper stocks.
Citi's Kaiser also suggests adding upside exposure to groups that had struggled since Trump first announced his aggressive tariffs on April 2, including tech hardware, consumer durables and those with weak balance sheets.
To Dennis Debusschere, founder of 22V Research, there's such a large valuation gap between riskier, economically sensitive companies versus higher-quality names that it leaves more room for the former to rally in the short term.
'Given how onerous the China tariffs were for small caps, that group has the most near-term upside,' he wrote to clients in a Monday note.
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