When Everyone Sells, Look Up

• Hedge funds recently dumped tech stocks at the fastest pace in a decade.

• JPMorgan says tech companies could fund the AI buildout without borrowing.

• Past selling extremes like this one led to big rallies.

Wall Street can have a cruel sense of humor…

There's an old saying on Wall Street that the stock market tends to do whatever hurts the most people the most. It's a cynical line with an institutional edge, and it's usually aimed at how the momentum crowd is positioned. When everyone's piled into the same sector, or the broader market, there's no one left to buy. The only thing left to do is sell. Once the exits get crowded, the selling feeds on itself. It doesn't stop until the weak hands, the ones who bought because everyone else was, finally get washed out. Only then can the fundamentals take back the wheel and the recovery begin.

That sounds a lot like today's market. The S&P 500 hit a record high earlier this month, and it's been under pressure ever since. Wall Street's worried that rising oil prices will push inflation higher and force the Federal Reserve to keep raising rates. The bears think we're at the start of a hiking cycle with several more increases to come. Tech has been hit hardest, since the sector is viewed as the posterchild borrowed money. The naysayers argue ballooning interest payments will either eat up profits or put some companies out of business altogether.

Yet recent research from JPMorgan and Goldman Sachs suggests the bears likely have it backwards. JPMorgan ran the numbers and found the global tech sector's cash flows exceed its capital spending by roughly $400 billion this year. Meanwhile, Goldman says hedge funds have dumped tech at a pace that rivals the selling at the start of COVID and ahead of Liberation Day. Both of those turned into big buying opportunities. If history rhymes again, this flush could lay the groundwork for a steady, long-term rally in the S&P 500 Index.

But don't take my word for it, let's look at what the data's telling us...

Start with positioning. According to Goldman's prime brokerage desk, hedge funds net sold global tech stocks over the past two weeks at the fastest pace in a decade. It was 3.3 standard deviations below normal. That's an even deeper flush than the COVID crash. It’s noteworthy because in statistics, any event outside of 2 standard deviations is increasingly rare.

Net exposure among U.S. long/short funds (chart at the top) just posted its biggest weekly drop since Liberation Day and now sits at the 0th percentile over the past one, two, and five years. In the AI trade, the long/short ratio has fallen to the 6th percentile versus the past year, down from its highest level since at least 2023 back in June. In plain English, momentum investors have rarely had such low exposure to stocks.

Here's where it gets interesting. Gross leverage is still up. Funds have gotten less long, but they haven't gotten smaller. That money hasn't left the building. It's hedged. And Goldman notes the fear of lagging the benchmark hasn't gone away. If stocks turn higher, those managers will have to chase.

The sentiment gauges are flashing the same signal. Last Friday was the largest S&P 500 put-volume session of all time. More than $3.3 trillion in notional value changed hands. In addition, semiconductor stocks fell eight days in a row, the longest losing streak since 2006. JPMorgan argues this is about risk limits, not fundamentals. Chip stocks now eat up about a fifth of all the risk capital in global equity markets, well above their 13% market weight. So, when volatility rises, funds are forced to reduce exposure. JPMorgan believes that overhang has now been largely unwound.

Now let's tackle the bears' main argument regarding the debt. JPMorgan expects the global tech sector to generate about $2.2 trillion in cash flow this year against roughly $1.8 trillion in capital spending. In other words, the sector doesn't need outside money to fund the AI buildout. So why all the bond issuance? Buybacks. Tech is borrowing so it can keep returning cash to shareholders while it builds. If funding gets tight, companies can simply dial those buybacks back.

What about the neoclouds at the center of the scare? JPMorgan pegs them at about $30 billion of the sector's cash flow and $80 billion of its capital spending. That's a small slice, and the hyperscalers have the balance sheets to absorb it. Even if tech grows capex 25% a year through 2030 and cash flow only 20%, JPMorgan still sees a slight surplus. That's not a sector on the edge.

So where does that leave us? After the COVID crash, the S&P 500 was back at a record high by August 2020. After the Liberation Day selloff, it made a new high by late June 2025. In both cases, the crowd sold at exactly the wrong time. And next week, 44% of the S&P 500 reports earnings. If results confirm the cash-flow math, the underweight funds will likely buy back in.

That brings us back to the old saying. Right now, the trade that would hurt the most people the most isn't another leg lower. It's a rally. The weak hands are out, and the fundamentals are intact. That's the setup for the next leg higher in the S&P 500. And the contrarians will be the ones positioned for it.

Five Stories Moving the Market:

Meta ‌forecast fourth-quarter revenue above Wall Street estimates and reported strong growth of its new consumer AI agent app Muse; CEO Mark Zuckerberg said he expected Muse would eventually serve "billions of people" who would potentially generate more revenue than the average Meta user – Reuters. (Why you should care - CFO Susan Li said she expects the company’s AI business to begin contributing incremental revenue in 2027)

Texas Instruments, the biggest maker of analog and embedded processing chips, gave a strong revenue forecast for the current period, lifted by demand from automotive and industrial customers; sales will be $5.8 billion to $6.3 billion in the quarter ending in December, compared to the expectation for $5.73 billion – Bloomberg. (Why you should care – Texas Instruments said it experienced broad-based growth and has benefitted from having a diversified customer base)

Middle East mediators are scrambling to revive talks with Iran, fearful that hostilities could flare anew as the U.S. moves another aircraft carrier to the region and Israel warns that it has prepared plans for possible new strikes – WSJ. (Why you should care – Iran’s foreign minister said indirect talks with the U.S. are continuing over a seven-day ceasefire proposal)

IBM CFO James Kavanaugh said delayed software deals that rattled ​investors in the last quarter were beginning to ‌close, as the company lifted its forecast for the business and reported better-than-expected third-quarter earnings; Kavanaugh said ​IBM now expects annual software revenue growth of about ​7% to 8%, up from 6% to 8% ⁠previously – Reuters. (Why you should care – the company experienced a rebound in software spending after unexpected delays last quarter)

Iran’s millions of barrels of floating oil reserves in Asian waters were fully drained by mid-October, according to Kpler, because the U.S. naval blockade kept Tehran from replacing the crude it sells to Chinese refiners; those tankers had served as a key cushion for most of the war, bringing in billions in sales from China – WSJ. (Why you should care – Tehran has lost another bargaining chip in its negotiations with the U.S.)

Economic Calendar:

Earnings: PG, UNP, VLO, LMT, NEM, WDC, BX, CMCSA, NSC, HON, BE, NDAQ, FIX, PCG, CBRE, ROP, HBAN, VRSN, DOV, DGX, OMC, PHM, DOW, SNA, TSCO, NVR, ALLE, DECK

France - Business Climate Survey for October (2:45 a.m.)

SNB - Summary of Monetary Policy Discussion (3:30 a.m.)

BoE's Bailey (Governor) Speaks (6:50 a.m.)

U.S. - Initial Jobless Claims (8:30 a.m.)

U.S. - Continuing Claims (8:30 a.m.)

Canada - Industrial Product Price Index for September (8:30 a.m.)

U.S. - Leading Index for September (10 a.m.)

Eurozone - Consumer Confidence for October (10 a.m.)

U.S. - EIA Natural Gas Storage (10:30 a.m.)

U.S. - Kansas City Fed Manufacturing Index for October (11 a.m.)

Treasury Auctions $26 Billion in 5-Year TIPS (1 p.m.)

Fed's Balance Sheet Update (4:30 p.m.)

U.K. - GfK Consumer Confidence for October (7:01 p.m.)

Japan - CPI for September (7:30 p.m.)

Japan - S&P Global PMIs (Preliminary) for October (8:30 p.m.)