In recent weeks, financial markets have been experiencing volatility. Interest rates have been on the rise, and stocks have seen a significant decline after a strong performance in the first half of 2023. This turbulence provides insights into the current sentiments of U.S. equity managers.
S&P Global’s investment manager index survey reveals that U.S. equity investors have become increasingly risk-averse due to concerns over expensive stock prices. The report highlights that most sectors have fallen out of favor, although the S&P 500 has still gained nearly 25% since its low point in October.
One of the main drivers of the strong market performance earlier this year was the surge in tech giants investing in artificial intelligence. However, Quincy Krosby from LPL Financial expresses worries regarding the high valuations associated with this trend.
Investment managers are now facing multiple pressures on stocks, including geopolitical issues such as China’s weakness and the war in Ukraine. However, the Federal Reserve’s actions are currently playing the most significant role. It is anticipated that the Fed will raise interest rates in an effort to combat inflation. As a result, investors are shifting away from stocks and towards bonds, which are seen as more attractive as their prices become relatively cheaper.
Ironically, the biggest risk moving forward is that the economy becomes too strong. This could have negative repercussions on the Federal Reserve’s actions and the market. There is concern that continued rate hikes by the Fed may increase the likelihood of a recession in 2024.
If a recession were to occur, it would have a negative impact on stocks, at least in the short term.
