One of the stock markets' key supports may be weakening even as indexes flirt with record highs, according to UBS. A trading desk note from the bank's U.S. equity derivatives strategy team said that retail demand for artificial intelligence stocks appears to be drying up, raising the specter of a market decline. At the same time, many hedge funds also appear to have had their fill of stocks and could be moving to the sidelines, the UBS note said. "Market is now on thin ice without a deep bench of buyers anymore, which implies limited upside potential vs large downside risk," the note said. The retail crowd has mostly embraced a "buy the dip" mentality in the post-Covid era, and has been repeatedly rewarded each time. But even as the meme stock trade has shown strength recently, retail traders in general are shying away from the very AI stocks that have been the core of this rally, UBS data shows. "Retail AI Selling continues and is expected to be Bearish Medium-term: After 18 months of retail buying spree in AI Winners ... that pushed SPX MAG-7 weight to all-time high ... UBS RMM clients have been unwinding AI Winners since Jan (with a 2-month tariff triggered disruption in Mar & Apr)," the note said, referring to the bank's Retail Market Making customers. UBS compared this current set-up to July 2021, about four months before the first Covid-era market rebound sputtered. The Nasdaq Composite hit a peak on Nov. 14, 2021, and then it did not make another new high for more than two years. .IXIC 5Y mountain The Nasdaq Composite did not overtake its 2021 high until 2024. Several key AI stocks are among the biggest companies by market capitalization and have significant influence on cap-weighted indexes like the S & P 500 and Nasdaq. Chip giant Nvidia has the largest weight in those indexes, with a market cap above $4 trillion. Without the persistent demand from the retail crowd, this market rally could struggle once institutional traders and hedge funds decide they've caught up to this year's move. "Given retail investors represent over 40% of directional cash volume ... their persistent selling would likely win over [hedge fund] short-term buying in medium-term after HF stops chasing," the UBS note said.
