Investor risk aversion eases, though lingers, in October

A risk-averse mood continues to cloud US stock market investor outlook for a fourth straight month, although overall risk sentiment has improved from September's 16-month low, according to the latest results from S&P Global's Investment Manager Index survey.

The Risk Appetite Index remained in negative territory in October's survey at negative 10%, up from negative 29% in September. This marks the first rise in sentiment since May's index reached 28% from 5% in April. The index showed positive readings from February to June, indicating net risk tolerance in that period, but has remained negative since July.

"Risk aversion continues to dominate in October. ... However, sentiment has become less negative than in September amid increased hopes for further interest rate cuts and reduced pessimism regarding the near-term macro outlook," Chris Williamson, executive director at S&P Global Market Intelligence, said in a report released alongside the Investment Manager Index (IMI) survey results.

About 47% of surveyed investors expected US equities to lose value over the 30 days following the Oct. 4 end of the survey period.

Central bank policy boosts confidence; political risk weighs heavier

Investors were increasingly confident that central bank policy could benefit near-term market returns after the US Federal Reserve signaled the start of an interest rate easing cycle with its September rate cut. The IMI sentiment index for central bank policy impact on market returns reached its highest point since May 2021 at 58%.

Besides central bank policy, net investor sentiment was positive only for shareholder returns and equity fundamentals.

Survey respondents continued to express concern that the political environment would have the greatest negative impact on market returns. This coincided with escalating geopolitical tensions in the Middle East and uncertainty surrounding the outcome of the upcoming US presidential election in November.

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. 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.

Investors also remained wary that high equity valuations could drag down market returns. The IMI survey showed that valuations were the second-most pressing concern after political environment.

Sentiment shifted the most for the global macroeconomic environment. Though the index reading for this factor was still negative, it climbed to negative 26% in October's survey from negative 44% in September's survey. This may hint at a reduced recession risk.

Interest in defensive sectors persists

While risk sentiment remains averse, surveyed investors still reported bullish expectations for potential near-term performance in nine of the 11 equity sectors tracked by the IMI. This was boosted by index readings that flipped from negative in September to positive in October for basic materials, energy and IT.

However, certain sector preference trends persisted from previous months.

"Sector preferences are skewed toward defensives such as healthcare and utilities, with consumer discretionary remaining the most out of favor, underscoring the prevailing cautious mood," Williamson said.

Despite caution toward consumer discretionary entities, October's index reading for the sector moved up to negative 23% from negative 40% in September.