Is the US Stock Rally Running Out of Steam? Analyzing the Waning Retail Investor Momentum

The S&P 500's recent rally—driven in part by retail investors pouncing on dips after President Trump's tariff announcements—faces a critical test as Asian retail buying of US equities plummets. With South Korean and Japanese investors turning net sellers and Singaporean participation dropping by 25% in May, the question looms: Is the retail fuel powering this market run about to sputter out?

The Decline of Retail Momentum: Data From the Trenches

South Korea, once a powerhouse of retail enthusiasm for US tech stocks, has flipped to net seller status in May—the first such shift since before the 2016 election. The decline is stark: purchases of US ETFs by Korean retail investors fell from $3.22 billion in April to negligible levels, as the DIREXION SEMICONDUCTORS BULL 3X ETF and other leveraged funds cratered after tariff-driven volatility. Meanwhile, Singapore saw a quarter of its retail traders exit US stocks in May, citing fears of prolonged trade wars. Even Japan, traditionally cautious, reduced holdings of US ETFs, with institutions now holding a net 20% underweight in equities.

JPMorgan's Warning: Retail Fatigue is Real

JPMorgan strategists argue that retail investors are exhausted after chasing high-risk US tech stocks like quantum computing and AI firms. Their leverage-heavy bets—such as 3X ETFs that lost 80% of their value in May—have left portfolios bruised. Meanwhile, institutional investors remain underweight equities, with 60% of fund managers now calling the market “overvalued.” Without retail's “buy the dip” enthusiasm, even modest declines could spark panic.

Citigroup's Caution: Trade Wars Make Dips a Trap

Citigroup analysts caution that buying dips in this environment is perilous. With tariffs on $200 billion of Chinese goods now at 145%, and the US credit rating downgraded, the “buy the tariff” strategy has backfired. Sectors like autos and materials, already reeling from supply chain disruptions, face further margin pressure. Utilities and consumer staples, conversely, have held up better, offering a glimmer of safety.

Sector Implications: The Fragile Recovery

• Autos/Materials: Vulnerable to rising input costs and trade barriers. Ford and GM's shares have lagged the S&P 500 by 15% since March.
• Utilities/Consumer Staples: Outperforming as investors seek stability. Duke Energy and Procter & Gamble are up 8% and 5%, respectively, in May.
• Tech: Divided. AI stocks like NVIDIA remain buoyant, but semiconductor ETFs have collapsed alongside South Korean retail exits.

Strategic Recommendations: Prudent Retreat or Wait for a Dip?

1. Reduce Exposure: Trim cyclical bets (autos, industrials) and prioritize quality names with pricing power.
2. Go Defensive: Overweight utilities (e.g., NextEra Energy) and consumer staples (e.g., Coca-Cola).
3. Wait for a Dip: Use S&P 500 breaks below 4,200 as buying opportunities—if tariffs ease.

Conclusion: The Rally's Fragile Foundation

The S&P 500's gains have relied on a volatile mix: retail adrenaline and institutional hesitation. With Asian retail participation collapsing and geopolitical risks escalating, the rally's sustainability hinges on one question: Can institutional buyers step in to fill the void? History suggests they rarely do during trade wars. For now, the safest bet is to assume the rally is running on fumes—and prepare for a bumpy ride ahead.

This analysis is for informational purposes only and should not be construed as financial advice. Always consult a licensed professional before making investment decisions.