Retail investors are getting cold feet about stocks, just when the market needs them most

By Jules Rimmer

Hedge funds reduced exposure last week, and retail investors are no longer so keen to 'buy the dip'

The market could do with some support from retail investors, but there are competing demands for their capital now.

Retail investors are getting cold feet about stocks, just when the market needs them most. High energy prices and fading consumer sentiment are sapping the appetite of individual traders, while the spike in U.S. Treasury bond yields BX:TMUBMUSD10Y to in excess of 5% suddenly provides more competition for cash.

Ben Snider, chief equity strategist at Goldman Sachs, published a research note late Friday that pointed to retail participation in the stock market declining by around a fifth since the summer and by 45% compared with late 2025. For Snider, this is consistent with trends in personal savings rates and more expensive gas prices. There is also the distraction for retail investors that is now provided by prediction markets, which allow them to express a view on stocks without buying them outright.

Retail investors' participation in the stock market is dwindling owing in part to generous bond yields and higher energy prices.

One year ago, Snider explains, prediction-market volumes were about $5 billion monthly. Now this figure is more like $78 billion. This isn't to mention the cash that floods into exchange-traded funds or options markets.

Very recently, Goldman has detected a slight uptick in retail activity, a slight "buy the dip" default reaction to falling stocks, but overall this has not been enough to arrest the correction.

Last week's equity-market turbulence inflicted significant damage to hedge-fund trading books. Risk managers de-risked and de-levered.

Meyrick Chapman, principal and founder of Hedge Analytics, commented on "massive U.S. equity hedge fund dislocation on Thursday in particular." He highlighted how exaggerated some moves were in the most popular hedge fund longs and shorts and pointed to it being the second-most volatile day of the year for this class of stocks.

Last week saw a major unwinding of the most popular hedge fund long and short positions.

Given rising equity supply, though, markets need household demand for U.S. equities to pick up the slack, despite the volatility Chapman identifies. In the first half of 2026 retail investors did just that, buying $840 billion in stocks.

The importance of this class of investor is highlighted in the report because households own 42% of the overall stock market directly, with the top 10% of those households accounting for seven-eighths of that.

Looking forward into 2027, the Goldman portfolio strategy research team expects bond yields and the health of the labor market to determine how much stock households invest in. They expect demand to remain "solid" with shifts in retirement-asset allocation in favor of equities being partially offset by higher interest rates and by disruption related to artificial intelligence.

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-26-26 0937ET