Risk tolerance among US equity investors appears to be turning the corner following a two-year period of mostly negative market sentiment, according to the latest results from S&P Global's Investment Manager Index survey.
The survey's Risk Appetite Index surged to 13% in November, up significantly from negative 8% in October. That marked the first time the index touched double-digit positive territory in nearly two years, helped by a growing stance that interest rates have peaked.
"A growing conviction that the [Federal Reserve] has reached peak rates, combined with the resolution of the House Speaker impasse, has lifted US equity market investor sentiment," said Chris Williamson, executive director at S&P Global Market Intelligence.
The Fed maintained interest rates at current levels at its latest meeting, and the likelihood of one more rate hike at the December meeting stood at only 14.3% on Nov. 13, according to the CME FedWatch Tool, which measures market sentiment based on futures trading.
Equity investors' expectations for US equity market performance also improved dramatically in November, soaring to a positive 27% from a negative 10% last month. This was the most positive reading for the index in two years and the second-highest since the launch of the survey in late 2020.
Biggest investor worries
The political environment remained at the top of the list of investors' concerns in November due to the Israel-Hamas conflict, with a score of negative 69%, followed by the global macroeconomic environment at negative 56%.
Investors perceived central bank policy as contributing much less negatively to US equity market returns in the near term, given the expectation that an interest rate peak has been reached. Though still rated as a drag on equities, the category's score improved to negative 15% from negative 50% in October.
Perceptions of most other categories improved in November, but all except for shareholder returns still fell into negative territory.
"While cautious optimism prevails, the market looks like it needs more signs of improved economic prospects before a turning point in sentiment is clearly evident," said Williamson.
Sector focus
Investor sentiment saw notable improvements across all sectors except for healthcare in November amid the upswing in risk appetite.
Energy and healthcare remained the most favored by investors, though investors also indicated they were bullish on IT, communications services and consumer staples. Communications services recorded the most positive score for the sector in nearly two years, while sentiment toward IT was at its most positive in 15 months.
Compared to the previous month, financials and utilities saw the greatest improvements in investor sentiment. Financials rose to negative 1% from negative 28%, while utilities were up to negative 6% from negative 32%.
Earnings expectations
Even as the sentiment improved overall, equity investors held a negative view of earnings for the next quarter.
A little more than a quarter of respondents said they had adjusted their earnings expectations lower amid declining profit margins and weaker-than-expected forward guidance, while just 13% reported an upward revision. The remaining 61% of investors made no adjustment to their outlooks.
"Corporate earnings have been a mixed bag in the third quarter and forward-looking guidance has been more measured to reflect the challenging economic climate," said Mohammad Hassan, head of APAC Equities - Dividend Forecasting at Market Intelligence. "In this environment, forward-looking dividend estimates and expectations on share buybacks will likely be tested over the coming months."
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 Nov. 1-5.
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