US equity investors' risk appetite grew in March, according to the latest results from S&P Global's Investment Manager Index survey. Investors' outlook on equity market returns, however, fell deeper into negative territory.

Risk appetite among US equity investors grew to 14% in March, up slightly from 13% the previous month, according to the survey's Risk Appetite Index. Except for a dip into risk aversion in January, investors have shown a consistent degree of risk tolerance since November, following a nearly two-year period of risk aversion.

Moderating rate cut expectations amid sticky inflation affected investors' near-term outlook in March, but expectations of growth also bolstered investors' attitudes toward most industry sectors.

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 March 3–6. If you would like to receive the full report on a regular basis or participate as a panel member, please email economics@spglobal.com.

Valuations perceived as greatest drag

Intensifying questions about the sustainability of the current market rally drove investors to view valuations even more negatively in March, with concerns over valuations having been most pronounced since September 2021.

"Near-term negative sentiment seems to be based on concerns over how quickly current valuations have been achieved, so some pullback is expected before we see renewed gains before the end of the year," said Chris Williamson, executive director at S&P Global Market Intelligence.

Despite a slight improvement in March, investors continued to perceive the political environment as a significant drag on near-term returns amid uncertainty related to the upcoming US presidential election and ongoing conflicts in the Middle East and Ukraine.

Government fiscal policy saw the greatest increase in favor among investors over the month and entered into positive territory for the first time in over two years.

Returns in question

Investors' expectations for US equity market performance worsened over February, with the Equity Returns Index declining from negative 11% to negative 12%. Nearly half of surveyed investors expected the equity market to remain steady over the next 30-day period.

Looking ahead to year-end, investors held a more positive outlook on the stock market and the potential trajectory of the S&P 500. Investors who expected the index to close out the year above 5200 were at 51%, while 24% anticipated a year-end reading between 5001 and 5200.

Sector outlook

Investors viewed eight of 11 sectors favorably in March, the greatest number recorded in over two years as most sectors enjoyed a boost in investor confidence over the month.

The financials, industrials and consumer discretionary sectors saw the most substantial improvements to investor sentiment.

"Consumer discretionary is gaining favor due to the resilience of the labor market and the broader consumer spending trend, especially in the face of likely rate cuts in 2024 and the anticipated easing in the cost of living squeeze," Williamson said.