US investors are growing increasingly risk averse as they view the recent stock market highs as unsustainable, according to the latest results from S&P Global's Investment Manager Index survey.

Survey respondents also believe volatile geopolitics, an uncertain political climate and historically elevated valuations will likely drag on equities. The survey's Risk Appetite Index fell to -5%, its lowest mark since October 2023 and a steep decline from the May 2024 level of 28%, the highest since November 2021.

Investor hopes for near-term returns have soured, with expected returns over the next 30 days falling to a three-month low and net risk aversion hitting the market for the first time since January.

Still, the survey found that investors continue to favor equities over other major asset classes, including commodities, corporate credit and sovereign debt, and that the US remains the major equity market most likely to generate the highest returns.

Top investor concerns

Investors see the political environment and valuations as the biggest drags on US stocks.

Worries over geopolitics have climbed to the highest level since January, including fears over the ramifications of the US presidential election and questions of political instability in Europe.

In addition, the US economy, which had been regarded as supportive of equities since the start of the year as the odds of a recession have fallen, is now viewed as having a neutral impact on stocks.

Investors still view shareholder returns and equity fundaments as the strong drivers of the market, as they have been for much of this year, but central bank policy is now viewed as supportive of stocks for the first time since January. The European Central Bank cut its benchmark interest rate in June, the Bank of England is expected to start cutting in August, and it is anticipated that the US Federal Reserve will begin cutting rates in September.

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 July 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.

The view that central banks are now supportive of stock performance has likely kept risk appetite from falling even lower, said Chris Williamson, chief business economist at S&P Global Market Intelligence.

"The fact that rates have not yet been cut in part reflects the resilience of demand in the economy, which has been positive for profits and earnings, but investors do want to have some confidence that the top end of restrictive monetary policy will be removed before the economy loses too much momentum," Williamson said.

Once the Fed starts cutting rates, or at least clearly indicates that the first cut is imminent, risk appetite will likely rise, but only if the central bank signals that inflation will come down to its 2% target alongside sustained growth, Williamson said. Cuts could lead to further risk aversion if the Fed signals that looser monetary policy is needed to address heightened recession risk, Williamson said.

Sector outlook

While investors have taken a more pessimistic view of the overall market, they remain supportive of eight of the market's 11 sectors, particularly healthcare, energy and information technology.

A year earlier, investors were only supportive of two out of 11 sectors: consumer staples and healthcare.

Investor optimism is likely based on the view that companies have been able to boost earnings despite the Fed's benchmark interest rate, which has been above 5% for about a year, Williamson said. Investors likely believed a year ago that lower rates were needed to sustain earnings growth, Williamson said.

"The belief that the rally can't be sustained largely reflects the concentration of recent market gains on a small number of stocks," Williamson said. "In other words, there will be a broadening out of market gains but there are some concerns that the top end of some valuations look unsustainable in the short term."