Short bets on tech stocks have piled up to a five-year high. Can an Anthropic IPO ignite an AI rebound?

Wall Street's recent risk aversion toward equities may have paved the way for a sharp rebound, with tech stocks particularly well positionedprovided Anthropic PBC's IPO can reignite market enthusiasm for AI. Data from Deutsche Bank shows investors have cut their equity exposure to roughly levels consistent with historical norms. Discretionary investors have reduced their US equity exposure to the lowest in more than a month, and funds employing computer-driven trading strategies have also trimmed positions. This leaves room for re-buying once confidence returns. Hedge funds have gone further, increasingly betting on stock declines. Goldman Sachs Group says that this month, for every $1 of stocks its hedge fund clients bought, they shorted about $5. Hedge funds' use of borrowed money to short stocks has reached close to a five-year high, according to Goldman records. If stocks begin to rally, these short bets could in turn fuel the advance, forcing bearish investors to buy shares to close out positions. Tech stocks have been hit especially hard. In the two weeks through October 16, tech stocks suffered their worst net selling in more than a decade on Goldman's records. Deutsche Bank says investors have sharply cut tech holdings since early October, bringing them to a six-month low, close to levels seen during the Iran war. Since October 6, the Nasdaq 100 has fallen 4.5%, as a grim macro backdrop has soured investor sentiment. The ongoing Iran war continues to push up Brent crude, heightening concerns about elevated inflation and interest rates. Meanwhile, doubts are growing about the sustainability of the AI investment boom. Comments from cloud computing provider CoreWeave highlighted the risks of debt-financing AI infrastructure, especially with rates rising. This pullback may leave tech stocks especially sensitive to shifts in sentiment. A successful Anthropic IPO could rekindle AI enthusiasm and draw investors back into the sector. "Investors have been adjusting portfolios as tech and semiconductor leadership has been challenged, and we're now near the level where investors just need confirmationa reassurancethat the 'AI narrative is still on track,'" said Joe Gilbert, portfolio manager at Integrity Asset Management. The Anthropic IPO will be a key test for the market after earnings season. Similar to the SpaceX IPO, investors will be seeking allocation to a one-of-a-kind unicorn stockat least until OpenAI listsand we expect demand to be strong. Retail investors could also help fuel a rebound. From late August to early October, retail buying of call options was unusually high relative to puts. That activity slowed over the past two weeks but remains above average, suggesting investors may still be willing to buy. "We think this suggests there is still room for retail to add to the AI trade," wrote John Marshall, a partner at investment firm Carrick Lane. The SpaceX listing offers an example of a large IPO drawing in retail investors. On Friday, June 12, the first day of SpaceX trading, retail investors bought more US stocks than they sold on Citadel Securities' platform, setting a single-day record for the platform. The firm handles about 35% of US-listed stock retail trading. Both stock and options volumes surged. "The scale of retail participation was enormous," said Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities. Still, not all investors are retreating, and the dry powder at long-only funds may be running out. Barclays data shows that while hedge funds have reduced bullish bets, traditional investment funds continue to buy US stocks. Stefano Pascale of Barclays says investors have put about $340 billion into US equity funds this year, more than triple the roughly $100 billion deployed in the same period in prior years. Active stock-picking funds now hold less than 1% of assets in cash, indicating most of their available capital has already been put to work. Even if AI enthusiasm returns, that could limit how much further these investors can buy.