US equity investors were increasingly willing to tolerate risk as their outlook on most industry sectors improved in December, according to the latest results from S&P Global's Investment Manager Index survey.
The survey's Risk Appetite Index continued to rise in December, reaching a two-year high at 16%, up from 13% in November. Higher positive numbers indicate greater risk tolerance. The index mostly captured varying degrees of risk aversion over the past two years as investors signaled they were more likely to shy away from riskier investments.
Federal Reserve officials on Dec. 13 voted to keep their benchmark interest rate at its current level and released projections that showed expectations of rate cuts in 2024. Ahead of that decision, the potential for both moves has given equity investors reasons to look forward to a more positive investing environment next year.
A total of 55% of the survey's respondents anticipate the benchmark federal funds rate to be cut by up to 100 basis points in 2024, while 22% indicated expectations of even greater rate cuts. The latest median Fed projections show a narrow cut to rates in 2024, though the predictions anticipate further cuts than were anticipated in September.
Investor worries ease
Though investors remained concerned about most categories' impact on US equity market returns, the extent of those worries largely moderated in December.
Investors perceived shareholder returns, equity fundamentals and — for the first time in two years — central bank policy as contributing positively to equity market returns amid rate cut expectations. This is also the first time in a year that categories beside shareholder returns were not seen as a drag on equities.
Perceptions of the US macroeconomic and global macro environment rose to multi-month highs in December, but still fell into negative territory at negative 3% and negative 31%.
The political environment and stock valuations remained the greatest concerns for investors in December.
Expectations falter
Equity investors' expectations for US equity market performance dropped from a two-year high, but remained positive and above most of the previous two years' monthly readings at 6%.
Although investors expected an improvement overall, sentiment was mixed, with 34% saying they expected the value of equities to increase over the next 30 days, while 28% said they forecast a decline.
Most surveyed investors are also taking the probability of a mild recession into account in their assessments. Over half of survey respondents said they still expected a mild recession over the next 12 months, while 23% anticipated mild or strong growth.
Sector focus
Greater risk appetite among investors also translated to a significantly more positive outlook across most industry sectors in December, with eight out of 11 sectors registering bullish investor sentiment.
Financials grew notably more favored by investors, rising from negative 1% in November to 21% in December as investors anticipated better growth prospects due to potential rate cuts.
Energy saw the greatest drop-off, falling from 35% in November to just 2% in December amid falling oil prices and demand concerns.
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 Dec. 4-10.
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