Stocktake: Investor sentiment turns cautious

Since July 2020, corporate profit margins are expected to fall

Stocks sold off last week following hawkish comments from the Federal Reserve. Even before the sell-off, however, there were signs market sentiment was becoming more cautious.

According to Bank of America’s latest fund manager survey, global growth expectations have fallen “drastically”, to their lowest level since April 2020. Similarly, for the first time since July 2020, corporate profit margins are expected to fall.

The net percentage of managers taking above-average risk has fallen from a peak of 25 per cent in February to 3 per cent today. European investors have raised their cash holdings to the highest level in a year. Investors have turned especially wary about emerging markets, which have gone "from favourite to forgotten", as Topdown Charts' Callum Thomas put it.

Still, the TINA trade (there is no alternative to stocks) remains alive and well, with most fund managers remaining overweight global stocks.


Other sentiment surveys suggest a similar picture. Sentiment is "in favour of bulls but not to any sort of extreme", says Bespoke Investment, pointing to recent readings of the National Association of Active Investment Managers' Exposure Index and the Investors Intelligence survey of equity newsletter writers. Retail investment sentiment, as measured by the weekly American Association of Individual Investors polls, is around its historical average.

US stocks have hit all-time highs every month this year but sentiment is not excessive. This cautious investor positioning, argued JPMorgan strategist Marko Kolanovic recently, is another reason why the rally may have further room to run.