Institutional Investors Hold Back as S&P 500 Inches Higher
Despite the recent rally in the S&P 500, large-scale investors have been notably absent. This has led to speculation that their reluctance could fuel a further surge in stock prices.
Institutional investors have been reducing their bullish bets due to uncertainties surrounding Trump administration policies and the Federal Reserve's rate path. Data from Deutsche Bank shows a decline in aggregate positioning among both rules-based and discretionary investors. Commodity trading advisors (CTAs) have also reduced their long stock exposure, a sentiment echoed by Goldman Sachs' proprietary data.
However, this cautious stance could prove beneficial for stock-market bulls. The perceived skepticism suggests a reserve of funds available for future purchases should concerns prove unfounded. Despite ongoing political uncertainty, inflation is easing and corporate earnings are largely positive.
"Positioning is not reflective of the current rally in risk assets and may cause some FOMU, or fear of materially underperforming, the benchmark," said Scott Rubner, Goldman Sachs' managing director for global markets. "We have a favorable technical window for the next one month."
The S&P 500 nears record levels, prompting investors to assess corporate earnings and Trump's latest policy announcements. The upcoming week will be pivotal, with the release of interest rate decisions and earnings reports from technology giants like Microsoft and Tesla. If the index continues to rise or remains stable, CTAs may invest between $15 billion and $30 billion in stocks, according to Rubner.
Hedge funds have already initiated this shift, adding to US stocks at the fastest pace in 10 weeks following the release of a favorable CPI report. Still, a proxy for hedge fund risk appetite indicates caution levels below last year's highs.
"While most hedge funds feel the fundamentals are still good, they're perhaps a little more careful than last year," said Jon Caplis, CEO of PivotalPath. However, if investor sentiment changes, institutional investors like mutual and pension funds could embark on a buying spree to avoid missing out, posited Matt Maley, chief market strategist at Miller Tabak + Co. Seasonality also favors inflows, with January being the largest month for mutual fund investments, according to Rubner.
"Even institutional investors with a cautious outlook will have to act bullishly if stocks keep rallying and they can quickly become short-term momentum players due to fear of falling behind," said Maley.