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US investors' risk appetite, outlook on equity markets cool

Expectations of a more positive near-term investing environment have faded recently, according to results from S&P Global's January Investment Manager Index survey.

US equity investors' risk appetite reentered negative territory in January, according to the survey's Risk Appetite Index. The index declined to negative 4% from a two-year high of 16% recorded in December 2023 putting an abrupt end to the brief revival in risk appetite seen toward 2023-end.

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"The data suggests we are still in a stage of heightened uncertainty about the extent to which interest rates will decline in 2024, with markets clearly pricing in more rates cuts than the [Federal Open Market Committee (FOMC)] is signaling," said Chris Williamson, executive director at S&P Global Market Intelligence. "In this environment, volatility is understandable."

Investors wary over geopolitics, valuations

The upcoming US election and conflict between Israel and Hamas contributed to intensified concern over the political environment, which is viewed as the biggest drag on equities.

Valuations were the next-biggest concern about stocks, according to the survey.

"There is some evidence of markets repricing the extent of the FOMC pivot in 2024 relative to the views seen late last year, though it's encouraging to see both central bank policy and US economy remaining positive factors perceived to be driving the market by the [Investment Manager Index] panel," Williamson said.

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For the first time in three years, investors ranked central bank policy as contributing the most positively to equity returns as the Fed is expected to gradually lower interest rates over the year.

Returns in question

Investors' outlook on US equity market performance declined to its second-lowest reading in over three years, registering at negative 42%.

"Investors have returned in 2024 with a more cautious approach to equity valuations, resulting in some pull-back from the optimism seen late last year," Williamson said.

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Though both groups anticipated a downturn in returns, the survey showed that larger funds, those with more than $1 billion in assets under management, reporting significantly lower returns expectations than smaller funds.

Sector focus

Investors grew more optimistic on most sectors since the previous survey, with healthcare and energy topping the list. Both sectors saw a boost compared to the previous month amid growing risk aversion, which tends to benefit defensive sectors.

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The technology sector was hit particularly hard by concerns surrounding valuations after a tech-driven rally propped up the S&P 500 through much of 2023.

Despite the mixed near-term outlook on the US equity market, investors reported decidedly positive expectations for equity markets globally in 2024.

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Investors expressed the most optimism for the Japanese equity market in 2024, followed by the rest of Asia. Investors were bullish on most other markets, besides mainland China.

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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 Jan. 3-7.

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

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