Retail investors' influence over the stock market is in decline as high-growth names tumble and meme-stock mania fades, JPMorgan says

• The pandemic-induced boom in retail trading is declining, JPMorgan said in a Wednesday note.
• The bank found that Robinhood's share of stock market transactions fell to levels last seen before the pandemic.
• But while retail investors trade fewer stocks, they're still putting money into equity funds, the bank said.

Retail investors' influence over the stock market is declining as they ditch trading individual stocks and risky options in favor of more traditional equity funds, JPMorgan said in a Wednesday note.

The bank found that Robinhood's share of stock market transactions in December fell to levels not seen since before the COVID-19 pandemic. A decline in trading activity was also observed at other retail brokerage firms, including E*Trade and Schwab, according to the note.

The decline comes after a year-long boom as people flocked to the stock market as a form of entertainment while coronavirus lockdowns put sports and other activities on hold. A frenzy in meme-stocks like GameStop and AMC Entertainment also added fuel to the retail trading fire.

But as the economy gets back to normal and as the meme-stock craze fades, so too is retail investors' trading activity, the bank found. That decline can also be seen in the daily activity of Reddit's WallStreetBets forum.

The forum was a haven for retail traders to post about their stock trades. The number of subscribers boomed from about 1.5 million in late 2020 to more than 11 million subscribers today. But subscriber growth has since plateaued, and the number of daily comments is well below its January 2021 peak.

The decline also coincides with a significant drawdown in high-growth stocks that generated soaring returns in 2020. In fact, some stocks have given up all of their post-pandemic gains, including Peloton, Netflix, and PayPal.

"Equity baskets containing stocks popular with US retail investors are conveying a similar message of weakening retail impulse since the beginning of 2021," JPMorgan said. And call option buys have fallen significantly from a January 2021 peak, and continue to decline year-to-date, according to the note.

"Whether one looks at the proportion of retail investors in total US stock trading or the number of stocks traded by retail investors, it is clear that US retail activity had peaked at the beginning of 2021 with diminishing peaks since then," JPMorgan said.

But while retail investors are abandoning the type of trades they put on in 2020 and 2021, they are still sticking with equity funds, with strong 2021 inflows into equity ETFs and mutual funds continuing into 2022, the bank said.