Equity investors remain cautious as risk aversion abates in October

US equity investors have grown less risk-averse, yet they remain wary amid expectations of higher-for-longer interest rates and concerns over the US political environment, according to the latest results from S&P Global's Investment Manager Index survey.

The survey's Risk Appetite Index improved to negative 8% in October from negative 9% in September. The index has not been positive since October 2022, and other than November 2022 at 0%, has not exited negative territory since December 2021.

"Among the various anticipated drivers of the market over the coming month, it was only the improved valuations-relative-to-historic metric that helped spur more enthusiasm for equities. The mood remains highly risk-averse on average, just less so than when valuations were higher," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

According to the survey, investors were almost evenly split on their recession views, with 52% seeing a recession as priced into US equities and 48% seeing the opposite. Of those surveyed, only 2% believed a substantial recession was priced into equities.

Political environment a key concern

Investors were the most concerned about the political environment in October, with a score of negative 69% — the highest reading for the category since May. While Congress narrowly averted a government shutdown in late September, it faces a mid-November deadline to resolve an ongoing debt-ceiling fight and must now elect a new speaker of the House of Representatives after Rep. Kevin McCarthy (R-Calif.)'s ejection from the role.

Central bank policy was ranked as a greater concern compared to September, at negative 50%, likely reflecting the shift in perception of the Federal Reserve's interest rate strategy.

At the same time, 70% of investors believed their investment appetites would increase if the Fed stabilizes its benchmark interest rate.

Nearly 90% of investors anticipate the rate-setting Federal Open Market Committee to keep the federal funds rate stable at the next meeting in early November, according to the CME FedWatch Tool, which measures market sentiment based on futures trading.

Expectations boosted

In a marked departure from the prior eight months, equity investors' expectations for US equity market performance improved dramatically in October, rising to negative 11% from negative 33% in September.

Although investors still expected losses overall, 32% said they expected equities to gain value over the next 30 days, up from 17% in September.

Sector focus

The financial sector posted one of the greatest month-over-month changes in investor sentiment, dropping from a score of negative 2% to negative 28%.

"The drop in favor for the financial sector is largely predicated on the concerns over rates remaining higher for longer than previously anticipated, which is harming demand for various financial products via raised borrowing costs, raising the risk of defaults and dampening market prices," said Williamson.

Healthcare and energy stocks remained the most favored by investors, though sentiment toward both categories stood at multi-month lows in October.

With investors only slightly less risk-averse than in the previous month and still leaning heavily toward defensive sectors such as healthcare and energy, real estate and consumer discretionary stocks remained at the bottom of investors' rankings.

Short interest in the two sectors also grew in September, as short sellers see persistently high inflation impacting both real estate and consumer demand.

S&P Global's Investment Manager Index survey includes monthly responses from a panel of just under 300 participants employed by firms that collectively represent approximately $3.500 trillion in assets under management. Data was collected Oct. 3-9.

If you would like to receive the full report on a regular basis or participate as a panel member, please email economics@spglobal.com.