Hedge funds have slowed their exit from value stocks and small-cap stocks over the past month, as enthusiasm for artificial intelligence has driven up valuations for growth stocks, JPMorgan Chase said in a report released on Wednesday.

The bank, which compiles data from its hedge fund clients to show aggregated positioning, said flows from value to growth stocks and from the Russell 2000 (.RUT) small-cap index to the growth-stock heavy Nasdaq Composite (.NDX) have "mostly slowed or paused."

The move comes as the Nasdaq has rallied this year and is up roughly 28%, while the Russell 2000 has modestly risen by 6.3%. Since the beginning of June, however, the Russell has outperformed the Nasdaq.

JPMorgan questioned if growth stocks would go back to outperforming. "A lot could depend on how resilient the U.S. economy remains and whether this keeps rates higher for longer," the Data Assets & Alpha Group team said in the note.

LeackStat 2023