Investors are chasing riskier bets as strong corporate earnings push stock prices higher and the Federal Reserve's pandemic-era economic support begins to wind down.

Equities have risen after a September slump, cryptocurrencies are up after a summer lull, tech-heavy growth stocks are outpacing value stocks and high-yield corporate bond spreads are dropping as investors chase higher returns over safer government bonds. Strong earnings, relatively low Treasury yields and cash piles built during the pandemic are all contributing to the growing appetite for risk.

That so-called risk-on sentiment is expected to continue through the rest of 2021 and into 2022, according to market experts. "Sentiment can get stretched and kind of stay in risk-on mode even if it kind of gets into frothy territory," according to Liz Ann Sonders, chief investment strategist at Charles Schwab.

Rising stocks, narrowing high-yield bond spread

Sonders said the September weakness in stocks was partly due to concerns about the Federal Reserve tapering. But now investors are dropping caution given positive economic data, including better-than-expected retail sales and good job numbers.

Retail and food services sales increased 0.7% month over month in September, according to the latest U.S. Census Bureau data released Oct. 15, beating economists' expectations of a 0.1% drop. Total nonfarm payroll employment rose by 531,000 jobs in October, according to the Nov. 5 Bureau of Labor Statistics report. The unemployment rate fell to 4.6%, with new job growth reported in leisure and hospitality, professional and business services, manufacturing, and transportation and warehousing. The Washington Post reported Nov. 17 that summer job numbers were dramatically underestimated by a cumulative 626,000 jobs.

Inflation has also surged to new levels, with the Consumer Price Index rising 6.2% year over year in October. The index is the market's preferred inflation metric.

Ed Moya, senior market analyst with trading services, currency data and analytics company OANDA, said earnings forecasts are "through the roof" for the next 12 months, and tech stocks remain a favorite for many.

Meanwhile, monetary and fiscal stimulus has caused an "enormous risk appetite" among investors, according to Gregg Lemos-Stein, global head of analytics and research at S&P Global Ratings.

For example, high-yield bond spreads are approaching pre-Great Recession lows after jumping during the pandemic. The spread represents the premium paid to investors for holding the riskiest rated corporate debt as opposed to safer U.S. government bonds. A narrower spread indicates greater investor demand for corporate debt. Spreads were at 3.18% on Nov. 3 after rising to over 10% in March 2020, according to the Federal Reserve Bank of St. Louis.

Investors are also piling into bitcoin and other cryptocurrencies. The S&P Bitcoin index, which tracks the performance of the popular cryptocurrency, has risen about 11% since early May, according to S&P Dow Jones Indices.

Bitcoin and other cryptocurrency prices have been driven higher by institutional demand and retail buying, according to Fawad Razaqzada, market analyst with ThinkMarkets. "As well as growing expectations over widespread adoption and use of cryptos, there is undoubtedly a level of speculative buying that is causing prices to rally as traders take advantage of the momentum in the hope of making profit from even higher prices," the analyst said.

What's next?

Moya forecast a strong finish to the year, with highs for the S&P 500 of 4,750 within range. "There is still too much stimulus in place and money in savings accounts for investors to become bearish U.S. stocks," according to the analyst.

Both market prices and market breadth will have important implications, Charles Schwab's Sonders said. If the breadth of the market stays healthy, instead of a few strong performers pulling along an index, "you have less to worry about with frothy sentiment."