The rally in stocks is losing one of its biggest backstops: dip-buying retail traders

• Bullish retail traders are showing signs of fatigued, JPMorgan said.
• Dip-buying retail investors piled into stocks during April's tariff-fueled chaos.
• JPMorgan said that waning retail participation could hurt the recovery rally since April lows.

The rally in stocks since tariffs shook the market could soon lose steam as a key group of buyers shows signs of slowing down, JPMorgan said this week.

Retail investors have been resilient buyers of stocks during the latest bout of volatility prompted by tariffs, but the trend is waning. Coupled with the fact that institutional funds have already rebuilt their positions after fleeing the market in April, there might not be much fuel for the S&P 500 to keep its rally going.

"A slowing of the retail impulse, more elevated equity exposures by equity-focused hedge funds, largely completed short covering by macro hedge funds, and continued lack of buying by foreign investors, all together imply more limited upside for US equities going forward," the bank wrote.

The benchmark S&P 500 has jumped 18% from its mid-April low, when it briefly dipped into bear market territory after Donald Trump revealed sweeping tariffs on imported goods.

Despite the intense volatility, retail investors emerged as a bulwark against deeper losses, buying the dip in stocks at historic volumes during the month.

"After two strong months the retail impulse appears to have slowed in May, perhaps implying some fatigue among retail investors after a protracted period of net purchases since mid-2023," the bank wrote.

Analysts are trying to gauge how far the rally can go. That's highly dependent on how US trade negotiations pan out, and whether the economy can avoid a recession.

For retail investors, JPMorgan suggests that another equity dip is necessary for the bullish impulse to return among the cohort.