Author: Zhao Ying, Wall Street Insights

The story of U.S. retail investors is changing. It’s not that retail investors are completely withdrawing, nor is it another round of GameStop-style mania, but that long-term allocations are still there and short-term speculation is receding. U.S. household stock exposure is still high, but in 2025 the household sector will sell a net stock of about US$631 billion, and at the same time increase cash assets by about US$1.4 trillion in one go in the fourth quarter. This set of data hardly supports the narrative of "all people chasing the rise".

Barclays U.S. equity strategist Venu Krishna and others made a judgment in the latest research: "Retail investors have re-participated, but it cannot be called a return yet." This sentence captures the core: In April, U.S. stock funds had a net inflow of nearly US$80 billion, which is likely to include a lot of retail funds;But compared with the highs in 2024 and 2025, participation has not gone back, especially the group of funds that are most willing to use leverage, chase hot spots, and do short-term operations, and they are obviously more cautious.

The real change is structural. There is still a steady inflow of low-cost index ETFs, and funds such as retirement accounts, fixed investments, and long-term allocations are not interrupted; however, there are outflows of leveraged long index ETFs, the inflow of leveraged single-stock ETFs has slowed, and the retail trading momentum shown by PFOF data has also begun to cool down since the second half of last year. This is not as simple as retail investors "not buying stocks", but that the risk budget for high turnover and high speculation may be diverted away.

Where to move? One new place to go is prediction markets. Monthly nominal turnover at Kalshi and Polymarket rose to about $20 billion, up from less than $5 billion a year ago. The scale is still much smaller than the S&P 0DTE option, but it is no longer a small toy. In the next few months, if prediction markets, sports betting and other non-financial speculation channels cool down seasonally, some funds may return to the stock and options markets; but whether this can be sustained ultimately depends on whether consumer confidence can be restored.

Stocks account for a record high in household net worth, but buying is not strong

By the end of 2025, stocks will account for a record 33% of U.S. household net worth. On the surface, this is retail investors embracing stocks; if you look at it separately, the logic is the opposite:The household sector sold approximately US$631 billion in net stocks throughout the year. On a rolling basis in the fourth quarter, this is the most obvious net outflow since the second quarter of 2023; on a natural year basis, it is the largest net outflow since 2018.

In other words, household balance sheets have become "more like stocks" mainly because the market has risen, not because the household sector is accelerating buying.

This is not inconsistent with the expansion of retail investors after zero commission trading in 2019-2020. Zero commissions have indeed increased the base of retail investors’ participation in U.S. stocks, and retail investors have transformed from occasional participants into a force that affects short-term prices, option demand, and capital flows. But now the marginal pricing behavior is changing: retail investors are still in the market, but their actions are not as fierce as in previous years.

The reflex of “buying when the market falls, chasing the market when it rises” has slowed down

In long-term data, retail investors have two habits when buying stocks: first, they are more active at the beginning of the year, and capital inflows tend to be concentrated in the first half of the year; second, they like to take action in two types of market conditions - buying the bottom after a sharp drop, or chasing the rise when there is a strong trend. Sideways fluctuations are the most difficult to stimulate the desire to trade.

The problem is that from the second half of 2025 to the first quarter of 2026, this impulse to "buy down/chasing up" weakens. PFOF data began to show a slowdown in momentum in the second half of last year, and this time point preceded the recent geopolitical shock.

Household cash behavior is revealing the same signal. Since 2022, the proportion of cash assets in financial assets has declined, which at first glance seems to be consuming cash and increasing risk appetite; but the rise in risky assets itself will drive down the proportion of cash. By the fourth quarter of 2025, U.S. households had added nearly $1.4 trillion in liquid assets in checking, savings, and money market funds, of which $1.1 trillion went into checking deposits. This is more like re-raising the cash cushion than an all-out attack.

Consumer confidence is also uncooperative. The University of Michigan's consumer confidence index is near past cycle lows, with the Conference Board Expectations Index hovering below 80, a level historically used to monitor recession risk. At the same time, households' expectations about whether stocks will be higher a year from now have become more volatile in 2025-2026. If your beliefs are unstable, you will not be decisive when buying the bottom.

The ebb is not index allocation, but leverage speculation

ETF capital flows provide a clearer view of the stratification of retail investors.

Low-cost, liquid index ETFs are still attracting money, with monthly net inflows equivalent to about 1% of fund assets. This type of funds is more like pensions, automatic deductions, and long-term asset allocation. They will not be withdrawn immediately due to changes in mood in a month or two.

It is the instruments of speculation that have become weaker. In the fourth quarter of 2023 and the first quarter of 2024, leveraged long U.S. stock index ETFs experienced significant outflows, but the inflow of leveraged single-stock ETFs accelerated at that time, indicating that risk budgets only shifted from the index level to single-stock expression. By the second half of 2025, the situation is different: Leveraged index ETFs are outflowing again, and leveraged single-stock ETF inflows are starting to slow down.

This gives an even colder signal: rather than simply switching to another type of stock instrument, highly speculative retail investors may retreat from the stock market as a whole, or move their risk budgets away from stocks.

Prediction markets have become the new speculative outlet

The appeal of the prediction market is straightforward: use a "yes/no" contract to bet on the outcome of a certain event, the price corresponds to the market's implied probability, and the correct bettor gets the full nominal value. It’s not like traditional stocks, nor like standard options, but it’s essentially close to digital options catalyzed around events.

The turnover of Kalshi and Polymarket is growing rapidly. Monthly nominal trading volume has risen to about $20 billion so far this year, up from less than $5 billion a year ago. Around the time of the presidential election, this type of “event contracting” began to gain more attention, and it did not recede quickly after that.

Of course, it is far from comparable to S&P 0DTE options. In March 2026, the nominal scale of S&P same-day option trading was approximately US$57 trillion, almost equivalent to the market value of the entire S&P market; S&P 0DTE options accounted for more than half of the total S&P options trading, compared with only about one-fifth five years ago.

But the prediction market is not small compared with other retail speculative products. Its size is close to some popular leveraged ETPs, and can be roughly compared with some index and single stock option coverage strategies. More importantly, many prediction market transactions are related to non-economic events, such as sports betting, which means that it may indeed be competing for the same group of "willing to bet at high frequency" risk budget.

The resurgence in April is real, but it is not a 2024/2025 craze

After the news of the ceasefire between the United States and Iran at the end of March, retail investors seemed to return to the US stock market. The net inflow of U.S. stock funds in April was close to $80 billion, and a considerable part of it almost certainly came from retail investors.

But the stream of reincarnation has obvious reservations. Households added a large amount of liquid assets at the end of last year, indicating that risk appetite has not fully recovered; doubts about the sustainability of the rise also remain. The recent entry and exit of the leveraged long and short QQQ ETF shows that some retail investors are more inclined to trade inversely to the V-shaped rebound driven by technology stocks, rather than pursue it unconditionally.

There is a possible window in the short term: political events predict that contract volume tends to weaken in the summer, and sports betting tax revenue will also decline after the NBA, NHL, NFL and college basketball seasons. If these non-financial speculation channels cool down, some high-risk funds may flow back into the financial market, fueling demand for stocks before the traditional funding off-season in the third quarter.

But taking a longer look, the key is consumer confidence. Easing financial conditions, labor market resilience, inflation and declining geopolitical uncertainty could all reinvigorate broader retail participation. Energy shocks, in turn, can drag on: U.S. gasoline prices have been above $4 for five consecutive weeks, and if global energy market disruptions continue beyond Memorial Day, demand destruction may be inevitable.

This framework does not describe the "return of retail investors" as a unilateral bullish view. Taking the S&P 500 index at 7,399 points on May 8 as the benchmark, the benchmark target given in the year-end scenario calculation is 7,650 points, corresponding to an upside of approximately 3.4%; the bull market scenario is 8,200 points, corresponding to an upside of approximately 10.8%; the bear market scenario is 5,900 points, corresponding to a downside of approximately 20.3%.

This means that the re-participation of retail investors can provide incremental buying. In particular, if highly speculative funds return from prediction markets, gambling and other channels, it may push up the demand for risky assets in the short term. However, if consumer confidence continues to weaken and cash preference remains high, it will be difficult for retail investors to replay the role of "buying more when prices fall and chasing prices when prices rise" in previous years. There are still retail investors in the U.S. stock market, but the most radical ones are no longer so loyal to the stock market.