30% gain in three months! The most popular stocks among US retail investors outperform the S&P 500

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U.S. retail investors are buying stocks at an unprecedented scale, with their favored stocks outperforming the broader market by a wide margin. The basket of 46 stocks most favored by retail investors tracked by Citigroup has risen 30% since early September, far outpacing the S&P 500’s 4.3% gain over the same period.

At the same time, retail trading volume has surged to historic highs. According to a research report released by Citi’s equities trading desk on Tuesday, retail trading activity has reached its highest level since the bank began tracking relevant data in 2018.

This wave of buying coincides with renewed optimism for artificial intelligence stocks, with a series of corporate deals, rate-cut expectations, and hopes for resilient earnings all boosting market sentiment. AI-related stocks remain at the center of retail enthusiasm, with companies like Dell attracting large capital inflows.

However, the trading volume spike has also raised concerns about overcrowding in retail investors’ favored positions. Strategists warn that momentum in some stocks has become overextended, and any correction in specific sectors such as quantum computing could have a disproportionate impact on broader indexes.

Trading Activity Hits Record High

Citi’s data on trading activity has broken the seasonal weakness typical of October, with volumes reaching the highest level since the bank began collecting data in 2018. The basket of stocks most favored by retail investors tracked by Citi includes companies such as SoFi Technologies Inc. and Riot Platforms Inc.

Data from other banks also show a significant spike in trading volumes. According to a report from JPMorgan equity and quantitative strategist Arun Jain to clients on Wednesday, from the close on October 2 to October 8, retail investors accelerated their weekly stock purchases to $7 billion, up from a weekly average of $5.3 billion over the previous two months.

Interactive Brokers Chief Strategist Steve Sosnick said:

"We have long believed that the rise in stock prices is mainly driven by a combination of FOMO (fear of missing out) and MOMO (momentum investing). At the moment, every dip is seen as a buying opportunity, and the upward trend is something investors are chasing."

AI Stocks Remain a Retail Hotspot

Artificial intelligence-related stocks remain at the center of retail enthusiasm. Dell recorded its largest capital inflow in nearly five months, while the 'Magnificent Seven'--Tesla, Nvidia, and Meta (but not Apple)--all saw large-scale buying, Jain wrote in the report.

The options market also shows signs of risk appetite. According to JPMorgan data, over the past seven trading sessions, retail gamma supply—a measure of the extent to which investors sell options and collect premiums from short-term call and put options—jumped to a record high of $93 billion. This surge was mainly driven by growth stocks, with the largest increases seen in technology and communication sectors.

In terms of ETFs, retail inflows reached $5.8 billion, the highest level in nearly five months. Investors also increased positions in precious metals, including the SPDR Gold Shares ETF (GLD) and the iShares Silver Trust ETF (SLV).

Quantum Computing Stocks Become a Risk Point

Strategists at 22V Research analyzed Goldman Sachs’ basket of stocks favored by retail investors, which has risen about 20% since early September, and found that some stocks are exhibiting signs of overextended momentum.

22V Research strategists stated that the recent rally has been mostly concentrated in tech stocks, which contributed 77% of the basket’s returns. Among the basket, three quantum computing stocks—Rigetti Computing Inc., D-Wave Quantum Inc., and IonQ Inc.—have stood out and accounted for the majority of the basket’s overall performance.

22V Research Chief Market Strategist Dennis DeBusschere wrote to clients on Wednesday:

"Given the concentrated contribution of these quantum computing stocks to the basket’s recent outperformance, any correction in these quantum stocks would have a disproportionate impact on broader indexes."

He added that even minor changes in interest rates, credit spreads, or volatility could trigger a sharp selloff in Citi’s retail-favored stock basket.

Risk Disclaimer and Exemption ClauseThe market carries risks, and investments should be approached with caution. This article does not constitute personal investment advice and has not considered the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their particular situation. Investment decisions made based on this article are at your own risk. ```