Wall Street has fallen out of favor with global fund managers who have cut allocations to the US stock market to their lowest level in 17 years to seek opportunities in Europe and emerging market stocks.
Bank of America’s Global Fund Manager Survey showed that in January, 39% of asset allocators held an “underweight” position in US equities, down from 12% in December, when sharpest collapse in sentiment in a single month in the history of the widely followed report, which began in 1985.
The darkening outlook for US equities underscores an important shift in global markets. Wall Street stocks were hot during the pandemic-era bull market that was sparked by massive stimulus measures rolled out by the Federal Reserve and the US government to combat the coronavirus crisis.
Tech titans such as Apple, Microsoft and Google owner Alphabet, as well as electric car maker Tesla and chipmaker Nvidia, have posted huge gains from market lows in 2020. The rally Wall Street’s index reversed sharply last year, with the broad S&P 500 falling nearly a fifth as the Fed began to rein in moves that lifted markets.
Now more than half of the 253 fund managers, who oversee combined assets of $710 billion, have said they expect the S&P 500 to trade below the 4,000 point level at the close. this year, while 37% expected the main US stock market benchmark to close 2023 above that mark. It was trading at around 4,010 on Tuesday.
Michael Wilson, an equity strategist at investment bank Morgan Stanley who has issued multiple warnings about the outlook for U.S. equities, said corporate earnings and profit margins were “likely to disappoint significantly whether there are whether or not an economic recession”.
“The main culprit is the high and volatile inflationary environment which is likely to wreak havoc on profitability,” he said.
Jamie Fahy, global strategist at Citi, said the US stock market would “suffer” if the tech sector started to see more earnings downgrades.
Major investment banks’ 2023 year-end forecasts for the S&P 500, made in December, ranged from a high of 4,500 by Deutsche Bank to a low of 3,400 by BNP Paribas.
The S&P 500 has risen 4.1% this year, but is behind the European Stoxx 600, which has gained 8.5% in US dollars and the MSCI Emerging Markets Index, which has risen 7.8% on the same basis.
Most investors believe the peak of global inflation has passed, which has also led to a slight moderation in recession fears, according to the BofA poll.
Fewer participants in the BofA survey expect the U.S. central bank to raise the federal funds interest rate to 5.25% or more this year. The proportion of respondents expecting US rates to reach this level fell from 44% in December to 20% this month. A 5% spike in the main US policy rate is now seen as the most likely outcome by the majority of global fund managers, with a range of 4.25-4.50% currently.
“Major investors are saying for the first time since March 2020 that monetary policy is too restrictive. They tell central banks that the monetary tightening cycle has worked too well and now is the time to stop [raising interest rates]said Michael Hartnett, chief investment strategist at BofA Global Research.
The abandonment of the United States by global fund managers has resulted in a move towards Europe and emerging markets.
Just over a quarter of global fund managers are now “overweight” in emerging markets. These large institutional investors also changed their allocation to European equities, moving from a net underweight of 10% in December to an overweight of 4% in January. An investor is said to be overweighted when he allocates to a region a share greater than his weighting in a benchmark index used to assess the performance of a fund manager.