Risk aversion among US equity investors appears to be fading as the outlook for a significant recession dims, interest rates are seen at or near their peak and the domestic economy seems to be trending up, according to the latest results from S&P Global's Investment Manager Index survey.

While the survey's Risk Appetite Index remained negative in September, at negative 9%, this is the least risk-averse investors have been since February and an improvement on net from August, when the index was at negative 24%.

"I think the key driver here is the reduced recession risk perceived by the survey panel, linked in turn to the fact that the economy seems to have weathered the storm of higher interest rates better than many had expected earlier in the year," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "Sentiment is also helped by the widespread belief that rates are likely to be at or near their peak."

The survey found that investor concerns around the US economy and interest rates have fallen, with 60% of investors still seeing a recession in the coming year. Still, that is down from 74% in March and 82% at the end of 2022. Just 4% of investors are forecasting a deep recession, according to the survey.

At its two-day meeting that ends Sept. 20, the Federal Reserve is expected to keep interest rates at current levels and may be done hiking rates this cycle. This has fueled a decline in concerns from investors over central bank policy, which was at negative 28% in September, an improvement from a net negative 34% in August and negative 70% in July.

Top concerns

The view that stocks are currently too expensive tops investors' concerns with valuations versus historical levels scoring a net negative 63% in September, roughly the same as in August.

Bracing for losses

Despite some improvement in sentiment, equity investors continue to expect losses in the near term.

Only 17% of investors surveyed expect equities to gain value, up slightly from 12% in August. Half of the investors surveyed are expecting equities to lose value, with 33% expecting them to remain steady.

Sector views

Investors continue to favor healthcare and energy stocks while real estate and consumer discretionary stocks continue to be out of favor.

With risk aversion still relatively high, investors prefer defensive sectors, such as energy and health care, while residential and commercial real estate have been hit by rising interest rates and the rise of remote work.

Negative sentiment of real estate has eased to negative 53% in September from negative 71% in April.

"Sentiment clearly remains heavily negative, however, amid ongoing concerns about property valuations and the risk of defaults as the lagged impact of higher rates takes a greater toll," Williamson said.

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 Sept. 1-8.

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