JPMorgan analysts warn that US equities could face a $50 billion outflow due to quarter-end rebalancing by institutional investors.
"The declining short interest on SPY and QQQ ETFs has been providing a steady flow support to US equities over the past year," they note. However, they see this trend reversing as negative news or events could lead to investors unwinding short positions.
JPMorgan also highlights upcoming rebalancing by defined benefit pension funds, balanced mutual funds, and sovereign wealth funds as a potential drag on the market.
Their analysis estimates that US-defined benefit pension funds could see net equity selling of around $26 billion due to rebalancing. This number is based on an assumption that these funds rebalance a third of their estimated rebalancing flow in a given quarter.
Looking beyond pension funds, JPMorgan includes rebalancing by balanced mutual funds, estimating a modest $10 billion net equity sell-off. They further factor in potential sales from sovereign wealth funds like Norges Bank and the GPIF, bringing the total estimated outflow to $50 billion.
JPMorgan's note suggests that while the recent decline in short interest has provided support to US equities, this trend may not be sustainable. Combined with upcoming quarter-end rebalancing, it could lead to a significant outflow from the stock market.