The most speculative corners of the market may be getting too popular, too fast.
In a research note published Monday, JPMorgan warned that the rush into high-beta, momentum-driven stocks such as Palantir (PLTR), Coinbase (COIN), and Nvidia (NVDA) has reached “100th percentile” levels of crowding, the most extreme positioning in 30 years.
The crowding “not only presents a risk for this segment, but is also a red flag for the broader market, implying there is rising complacency in the short term,” strategist Dubravko Lakos-Bujas wrote.
Investors may be overly confident that the AI-fueled rally has more room to run, with names like Tesla (TSLA) trading at over 160x forward P/E, compared to around 22x for the S&P 500 (^GSPC).
The high-beta crowding, which includes low-value and speculative growth stocks, is happening rapidly. Positioning surged from the 25th to the 100th percentile in three months, the fastest climb since the firm began tracking the data three decades ago. JPMorgan notes that short interest has also dropped sharply, meaning fewer investors are hedging against downside risks.
It's the “third-extreme overcrowding” episode this year, according to the firm. In January, investors piled into AI-linked megacaps. In April, they sought safety in low-volatility names amid concerns about tariffs. Now, the hot money is chasing speculative tech and meme-adjacent plays, leaving the market more vulnerable to a pullback.
Read more: How to protect your money during turmoil, stock market volatility
When April's low-volatility crowding began to unwind, it did so within three months, the fastest unwind on record. Following this reset, Lakos-Bujas' team recommends getting back into lower-volatility names that have lagged the broader market.
Their blue chip stock picks have underperformed the market by 19% since April but may be poised to outperform if speculative bets start to unwind.
“Low vol once again presents an attractive risk/reward, especially with looming tariff deadlines (Aug. 1), adverse seasonality, and aggressive investor positioning,” Lakos-Bujas wrote.
Top picks in the group include Coca Cola (KO), Allegion (ALLE), Intercontinental Exchange (ICE), CME Group (CME), and CBOE Global Markets (CBOE).
Now may be the time to rotate back into safety, per the note.
Investors may be buying into a “Goldilocks” scenario of solid economic growth, falling inflation, and a more dovish Fed. But JPMorgan sees that optimism as fragile, and crowded AI trades could be subject to quick reversals. And risky stocks that are not linked to AI are at even higher risk of reversal, the firm added.
