JPMorgan analysts warn that U.S. stocks could face $50 billion in outflows due to quarter-end rebalancing by institutional investors.
“Decreasing short interest in SPY and QQQ ETFs has provided a steady stream of support for U.S. stocks over the past year,” they note. However, they see this trend reversing as negative news or events could lead investors to unwind their short positions.
JPMorgan also highlights the coming rebalancing by defined benefit pension funds, balanced mutual funds and sovereign wealth funds as a potential drag on the market.
Their analysis estimates that U.S. pension funds can expect net equity sales of about $26 billion as a result of a rebalancing. This figure is based on the assumption that these funds rebalance one-third of their estimated rebalancing flow in any given quarter.
Looking beyond pension funds, JPMorgan also includes a rebalancing by balanced mutual funds, estimating a net sell-off of equities worth $10 billion. They further take into account the potential sales of sovereign wealth funds such as Norges Bank and the GPIF, bringing the total estimated outflow to $50 billion.
JPMorgan’s note shows that while the recent decline in short-term interest rates has provided support to US equities, this trend may not be sustainable. Combined with the upcoming quarter-end rebalancing, this could lead to significant outflows from the stock market.
