$265 Billion In Capital Gains Tax Selling: Morgan Stanley Warns Momentum Mauling Is Coming, Thanks To The IRS

Two weeks ago we first discussed that, as hedge funds were quietly but aggressively liquidating tech names, it was retail investors that once again stepped up and were aggressively buying whatever institutions had to sell. Fast forward to today when Morgan Stanley's Quant and Derivatives team writes that a bid from retail has "been part of the equity market rally this year" which - for bulls at least - is the good news. The bad news is that as Tax Day approaches US retail investors will owe $265bn to the government in capital gains taxes, based on on QDS estimates, which while below the 2022 peak will still be the 3rd highest on record!

Needless to say, tax selling, especially when it is in size, ahead of April 15 matters and as the Morgan Stanley traders note, such payments historically have had an impact on equity flows: retail cash equity demand on QDS’s model based on public data is typically 20 to 40% below the prior year average in the weeks before Tax Day (and falls even more vs the Jan/Feb elevated run-rate), which Morgan Stanley calculates "could be a 1 to 2% drag on the S&P 500."