It comes as no surprise that the most crowded trade on the planet is long big-cap US tech.
Until (very) recently, it felt like the only trade on the planet, as A.I. optimism drove a delirious rally in Nvidia, which took anything and everything tech-ish along for the ride.
Although gains have broadened out a bit, it’s not over yet. Apple hit a new all-time high this week, and Tesla added nearly a quarter trillion in market value over the course of a 13-session win streak which Morgan Stanley’s Adam Jonas explained by reference to the A.I. mania. “The market wants to believe Tesla is an A.I. name first, an auto company second,” he said. (Other positive news flow obviously helped, but Jonas said “many investors may be again looking at ways to justify the valuation beyond the confines of a unit x price automotive/hardware model.”)
As the figure below shows, the share of fund managers in the June installment of BofA’s poll who identified big tech as the most crowded trade rose dramatically from May.
Note also that although the share who identified “short USD” fell materially, it still made the “crowded” list due to the perception that the Fed is near the end of the hiking cycle.
With that in mind, Nomura’s Charlie McElligott on Wednesday briefly enumerated four market scenarios that “would hurt most” in the second half of 2023. One of those scenarios: “A cyclical value (NOT secular growth)-led equities rally.” Note the all-caps. Notwithstanding this month’s grab for left-behind styles and sectors, there’s still an overriding preference for tech — there’s a reason it’s perceived as crowded.
As BofA’s Michael Hartnett pointed out, respondents to the bank’s survey are the most overweight tech versus energy since September of 2021.
“Cash levels [are the] lowest since January 2022, but asset allocator conviction is confined to tech and IG bonds,” he wrote.
That’s why an extension of the nascent cyclical surge would be painful. Another of McElligott’s “hurt the most” trades for H2: A stronger dollar, consistent with “short USD” still ranking on the “most crowded” list. “Folks are slipping back into ‘short dollar’ / carry trades on the ‘end of Fed tightening cycle’ meme,” Charlie remarked.
The other two scenarios McElligott said would wrong-foot markets: 1) Bear steepening due to “any number of possibilities,” including persistently elevated wage growth, sticky inflation, a reinvigorated housing market, recognition from policymakers that r-star is likely higher or simply coupon supply, and/or 2) MBS widening against more tightening in IG, contrary to Street expectations.
