US investor risk aversion stretches into 3rd straight month in April

New US tariffs extended existing pessimistic sentiment in equity markets into a third straight month in April as investors remain deeply risk averse, according to the monthly S&P Global Investment Manager Index survey report released April 8.

The survey's Risk Appetite Index in April nudged up 1 percentage point to negative 31% from negative 32% in March, the second-lowest reading in the survey's history dating back to October 2020. The index measures net risk tolerance among surveyed investors.

Surveyed investor sentiment deteriorated from January to March, and the survey's responses collected from April 1 to April 4 do not fully represent market reaction to US President Donald Trump's April 2 unveiling of the nation's reciprocal tariff plan. However, the slight easing of risk aversion seen in April's index reading could signal investor perception that markets have a somewhat clearer direction and opportunities could begin to emerge now that Trump's tariff details are known.

"While the tariff issue has not disappeared, we are now much closer to the beginning of the end," Martin Schulz, group head of international equities for the International Growth Equity Team at Federated Hermes, told S&P Global Market Intelligence. "Total market uncertainty has now been replaced with at least some semblance of recognition of the parameters of a new global trading paradigm even if not everyone, or anyone, is completely happy with the outcome."

Perceived drivers of equity market returns

Bearish investor sentiment toward stock valuations and central bank policy appears to have eased the most in April.

The survey tracks investor opinions on the influence of eight market factors. Index readings above zero for a factor indicate a stronger perception that it could positively influence near-term market returns.

Historically high stock valuations registered as the largest concern likely to contribute to negative market returns among surveyed investors from November to March. However, though still in bearish territory, the index reading for stock valuations in April improved from March by 15 percentage points to negative 58%. This could be attributed to the significant loss of stock value and potential for new buying opportunities following the global market sell-off that was triggered by the April 2 tariff announcement, according to the survey report.

The evolving landscape of stock valuations will be closely monitored as the market begins its upcoming round of corporate earnings reports.

"Corporate earnings are an important factor to maintain equity market valuation, given valuations have been significantly above the historical long-term average when the year started," Bryan Reilly, senior investment analyst for CIBC Private Wealth Management's Proprietary Investment Team, told Market Intelligence. "Earnings estimates are starting to decline, however, due to the weakening sentiment of both businesses and consumers. This is further compounded in a significant way by the recent tariff decisions."

Besides stock valuations, only the index reading for central bank policy climbed more, with a 17 percentage-point jump, flipping to 5% from negative 13%, as fears of a weaker economic outlook have increased investor expectations of further interest rate cuts from the US Federal Reserve this year, according to the survey report.

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 April 1-4. If you would like to receive the full report on a regular basis or participate as a panel member, please email economics@spglobal.com.

As concerns were somewhat alleviated over stock valuations and central bank policy, index readings fell month over month for equity fundamentals, the US macroeconomic environment, government fiscal policy and the political environment. The political environment and the US macroeconomic environment had the two lowest overall index readings at negative 77% and negative 65%.

Shareholder returns were viewed as the most optimistic contributor to near-term market returns with an index reading of 17%. This was the only factor besides central bank policy to yield a positive index reading.

Investors dig heels into defensive sectors

Investors signaled optimism in five of the 11 equity sectors tracked by the survey. Three of these sectors — utilities, healthcare and consumer staples — are generally considered to be defensive market segments favored during periods of market volatility. The lean toward defensive sectors continues a trend seen since February.

However, consumer staples and healthcare were among the seven sectors with dips in index readings from March to April.

The consumer discretionary sector saw the biggest index decline of 19 percentage points and continued to have the lowest overall index reading, similar to March.

Utilities had the highest index reading at 28%. The utilities and energy sectors each had month-over-month index score increases of 24 percentage points, the biggest jumps among all sectors.