‘Fear of missing out’ drives retail investors to ride AI wave

Retail investors have increased their exposure to technology stocks after missing out on the market rally driven this year by artificial intelligence, with many having preferred cash or low-risk money market funds.

Net purchases of US stocks by retail investors hit almost $1.5bn on May 30 and 31, the highest daily figures in three months, data from VandaTrack shows.

Tech stocks were among the main beneficiaries, at the end of a month in which retail interest in AI-associated companies began to broaden and benefit the likes of Palantir, Marvell Technology and UiPath, as well as bigger names like Nvidia and Microsoft.

After weeks on the sidelines, individual investors are “starting to chase the tech rally”, said Marco Iachini, VandaTrack’s vice-president. “Fear of missing out looks to be kicking in.”

Sticky inflation, a crisis of confidence in the US regional banking sector and uncertainty in the run-up to last week’s debt ceiling agreement meant smaller investors had cut their equity allocation in favour of bonds and low-risk money market funds offering yields comparable to those on stocks, according to Barclays analysts.

However, VandaTrack said retail purchases of money market ETFs had declined in recent weeks as “mom and pop investors” had begun shifting into riskier assets, lured by the Nasdaq Composite’s 27 per cent gain so far this year.

Vanguard’s Information Technology ETF and Fidelity’s MSCI Information Technology Index recorded chunky inflows last week and have risen to their highest levels in more than a year, suggesting a “re-emergence of the US retail impulse into tech”, said analysts at JPMorgan.

The bank said “younger” retail investors who tend to invest in individual stocks appear to be leading the charge, with appetite for exchange-traded individual equity options having “increased markedly” in recent weeks.

Reddit’s popular Wall Street Bets is, meanwhile, awash with comments from members who missed out on the tech rally or are baulking at how high some shares have risen. A widely shared meme shows Nvidia literally carrying the US stock market on its back. “Been sitting out the market for a bit but seeing these AI gains is killing me,” said one user.

Retail investors have not always been so risk-averse. Shares in struggling video games retailer GameStop rose more than 2,000 per cent in a month in 2021, at the height of the meme stock craze.

But so far the only GameStop-like stock attracting retail capital is C3.ai, a US-based software provider whose shares have jumped 195 per cent this year. It fell 14 per cent on Thursday, however, after revenue guidance for the 2024 fiscal year came in well below analysts’ expectations.

Nvidia, by comparison, has risen 170 per cent in the year to date and now trades at a price-to-earnings ratio of 190, up from 47 at the start of November.

Equity valuations and “a turnround in risk sentiment around AI-related stocks” were now the “key downside risk” to the wider US stock market, said Peter Garnry, head of quantitative strategies at Saxo Bank.

Until last week, the gap between retail flows and the stock market’s bumper performance implied institutional players such as hedge funds and systematic traders were the primary source of demand for AI stocks, VandaTrack said. Typifying many professional investors’ optimism, Geir Lode, head of global equities at Federated Hermes, describes AI as “the next supercharged growth area”.

Analysts at Morgan Stanley said they were “believers in the AI revolution” but that the technology would not be able to “stop or even cushion” a wider earnings recession later this year.