Dec 23 (Reuters) - Retail inflows into U.S. stocks are set to hit a record in 2025, as individual investors become a major force behind a rally that is likely to extend into the next year on hopes of interest rate cuts, analysts said.

The amount of cash retail investors poured into U.S. stocks so far in 2025 is up 53% from $197 billion a year earlier and 14% higher than the $270 billion hit at the height of the retail trading frenzy in 2021, according to J.P.Morgan analysts.

Retail trading, meanwhile, accounted for 20-25% of total ‌activity this year, touching a record high of about 35% in April, according to separate trading data from J.P.Morgan.

Individual investors snapped up high-quality stocks at discounts during selloffs, most notably after U.S. President Donald Trump's "Liberation Day" tariffs triggered a ​global meltdown in April, helping push the S&P 500 to fresh records. The benchmark index is up about 16% this year.

"Retail investors are here to stay, ‍especially for 2026. They made money this year, they like to trade stocks, they have the applications to do so. We ⁠will continue to see them being a ⁠good presence," said Steven DeSanctis, small- and mid-cap strategist at Jefferies.

Retail participation in the stock market has grown steadily over the years as the rise of low-cost, no-commission brokerages such as Robinhood and Interactive Brokers has made ‌it easier and cheaper for average Americans to access the market.

The trend got wider notice ​in 2021 as many Americans who were homebound during the COVID-19 pandemic and were flush with cash used mobile trading platforms to bet on everything from GameStop to Big Tech. 

AI plays such as Nvidia and Palantir Technologies were top favorites this year, according to retail brokerage ⁠data and executives, with the latter more than doubling in value as small-time traders ‍bought the dip when ​institutional investors stepped back on valuation concerns. 

Tesla shares , another top retail favorite, touched a record high on December 17, their first since the end of 2024.

"The two most active stocks on our platform are typically Nvidia and Tesla. Those are just two examples of individual investors seizing the narrative ‍and in many cases forcing institutional investors to play along," said Steve Sosnick, chief strategist at Interactive Brokers.

Quantum computing firms, uranium miners, metal miners and rare earth companies also saw substantial retail interest, as investors became more "thematic" in their approach.

RETAIL TRADERS INCREASINGLY PREFER ETFS

A key feature of retail trading in 2025 was the increasing preference for exchange-traded funds (ETFs) tracking equity indexes, cryptocurrencies and commodities, according to executives at major trading platforms.

"Investors continue to be attracted to the ETF technology. It trades throughout the day - it's tax efficient, it's transparent," said Bryon Lake, global co-head of Third-Party Wealth at Goldman Sachs Asset Management.

Direxion's Daily Semiconductor 3X Bull and 3X Bear ranked among the top five ETFs ​by dollar volume ‍on eToro, said Bret Kenwell, U.S. investment analyst with the trading platform.

Retail investors are making more informed trades now as indicated by fewer and shorter so-called "meme frenzies," said Joe Mazzola, head of trading and derivatives at Charles Schwab.

"Retail has been a little bit more in tune to the market dynamics ​this year," he added. 

POTENTIAL INTEREST RATE CUTS SEEN AS KEY CATALYSTS

Potential rate cuts by the Fed are expected to continue to boost markets next year, keeping up the retail momentum in 2026, according to analysts and brokerages.

Elevated stock market volatility may trigger dips that could also pull in individuals willing to wager on a bounce back, although recent evidence points to less enthusiasm about such opportunities than they have been in the past.

Reuters last week reported that Nasdaq is planning to submit paperwork with the U.S. Securities and Exchange Commission to roll out round-the-clock stock trading, a move analysts believe can further accelerate retail momentum. 

"We're in a kind of golden age of retail investing with better access to knowledge, to the markets themselves and advanced trading platforms," said ​David Russell, global head of market strategy at TradeStation.

Still, with doubts continuing to linger around the AI names that have dominated the market this year, analysts said they did not expect the coming year to top 2025's record as investors may consider broadening their portfolios.

Financials, communications, discretionary, energy, miners and gold mining ETFs could do well, eToro's Kenwell said. 

"But ultimately, retail loves tech so that is an area they will continue ‍to come back to in 2026, particularly if we do see any sort of volatility." 

(Reporting by Purvi Agarwal and Twesha Dikshit in Bengaluru; editing by Michelle Price and Anil D'Silva)