In July, AI concept stocks experienced a notable correction, but the downturn was short-lived, and the subsequent rebound was swift and forceful. Entering October, the AI sector is under pressure again, but JPMorgan's global strategy team believes the market is unlikely to replicate the previous recovery path this time.

JPMorgan strategist Nikolaos Panigirtzoglou noted that compared with July, investors' willingness to buy the dip has weakened, corporate buybacks have decreased, short positions that could convert into covering demand during a decline are smaller, and the scale of leveraged assets in exchange-traded funds (ETFs) has increased.

For investors holding AI infrastructure stocks, the more alarming judgment is: despite the share price declines, from positioning and fund flow perspectives, these stocks have not yet shown obvious oversold conditions.

Selloff spreads from Korea again, but dip-buying funds fail to follow

The initial signs of this round of AI stock turbulence once again appeared in Korea.

As key beneficiaries of AI infrastructure investment, memory chip giants SK Hynix and Samsung Electronics have both seen their share prices fall by nearly one-third over the past month. Market concerns are mainly focused on two aspects: the AI capex boom may slow, and lower-priced Chinese competitors may erode growth and profit margins.

In recent weeks, the selloff has gradually spread across the entire AI supply chain. Higher interest rates, along with Anthropic and OpenAI still struggling to achieve profitability, have led investors to reassess the growth prospects of AI infrastructure expansion. As of reporting, the Philadelphia Semiconductor Index has fallen about 10% over the past five trading days, with Intel posting a roughly similar decline over the same period.

But compared with July, the response of funds to the decline has changed.

Panigirtzoglou noted that during the first round of selling in the Korean stock market earlier, investors had bought the dip through leveraged and non-leveraged ETFs. But in the October correction, similar buying was scarce. The funds that previously helped absorb selling pressure have not yet clearly returned.

Short covering limited, leverage risks rebuilding

Differences in short positions also left the market lacking a potential support this time.

In July, short positions in the largest US-listed Korean equity ETF — iShares MSCI South Korea ETF (EWY) — had increased notably. But this month, the fund's short positions changed little. JPMorgan also noted that short positions in products such as the VanEck Semiconductor ETF (SMH) and the Roundhill Memory ETF (DRAM) are at low levels.

When short investors close positions, they need to buy back securities they previously sold. Therefore, after stock prices fall, buying from short profit-taking can sometimes help slow the market's decline or even drive a rebound. Currently low short positions mean this potential buying is relatively limited.

At the same time, leverage is rebuilding.

One indicator Panigirtzoglou watches is the ratio of assets under management in leveraged memory-chip ETFs relative to the total market value of the underlying stocks. The higher this ratio, the stronger the amplifying effect of leveraged funds on swings in the related stocks may be.

The ratio fell to a low at the end of July but rose again in August and September. This means some of the leverage risk released after the previous correction has now returned to the market.

Buybacks end early, rebound needs new buyers

Changes in corporate buybacks are another important difference between this correction and July.

After reporting strong profits in the second quarter, SK Hynix and Samsung Electronics announced stock buyback plans totaling $40 billion. These plans were executed faster than expected and were completed early in mid-October.

For the market, buybacks mean companies are using their own funds to buy shares, providing relatively sustained demand. When investors reduce positions and sentiment weakens, this buying can absorb part of the selling and ease downward pressure on stock prices.

Early completion of buybacks means this demand withdrew sooner than expected. The selling pressure previously absorbed by corporate funds now needs to be taken up by other investors. Even if companies' business prospects do not deteriorate further, changes in the balance of buying and selling may make it harder for stock prices to stabilize.

At the end of July, the market did not face the same sharp drop in buyback funds. Therefore, although both rounds of correction were first pressured by Korean memory chip stocks, the funding conditions supporting the subsequent recovery have differed significantly.

This also explains why JPMorgan emphasized that a decline in stock prices does not mean that positioning and capital flows have adjusted enough to support a strong rebound.

From the perspective of buying sources, the current market faces multiple constraints: ETF investors have not entered the market to buy the dip as clearly as they did in July; short positioning is low, meaning that demand for covering through profit-taking is limited; and the end of corporate buybacks has removed another force of sustained buying. At the same time, the relative scale of leveraged memory chip ETFs rose again in August and September, leaving the market facing the risk of leverage amplifying volatility even as its capacity to absorb selling has weakened.

These factors combined make a rebound more dependent on new capital entering the market. Falling stock prices can lower the cost of buying, but they cannot automatically create the willingness to buy. Faced with issues such as a possible slowdown in AI capital expenditure, intensifying competition, and uncertainty over earnings realization under high interest rates, investors may need more evidence before they are willing to increase positions again.

Therefore, JPMorgan's judgment mainly points to the recovery capacity after this round of correction: several sources of buying that drove the rapid market rebound in July may now have weakened or may not yet have appeared, while leverage risk has accumulated somewhat. This does not rule out a short-term rebound, but it means the market can hardly expect the same rapid and equally powerful recovery based solely on previous experience.

Following this analytical framework, what is worth watching going forward is: whether Korean and semiconductor-related ETFs can attract funds again, whether leveraged positions are digested, and whether companies launch new buyback plans. Before these supports improve, this round of AI stock correction may need more time to re-establish a sustained buying base.

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