Funds stayed cautious in February. Though still negative, their views of growth stocks and cyclicals in the stock market are turning rosy.
Funds are seeing negative near-term and positive longer-term outlook for growth stocks. The S&P Global Investment Managers' Index, based on data from 300 institutional investors with $3.5 trillion under management, favored a low-risk approach in February.
In the near term, investors expect lower earnings from the stock market. So they are focusing on stocks that pay cash dividends.
The risk appetite index was the second lowest recorded since the survey began in October 2020. The Expected Returns Index fell to -32% in February from -14% in January.
Economic Optimism And The Stock Market
However, with growing confidence that favorable economic conditions will lead to a soft landing, risk appetite appears to be returning. Funds' overall degree of risk aversion has fallen to the lowest point since November.
Chris Williamson, Executive Director at S&P Global Market Intelligence, says that while a risk-off mood prevails, the degree of risk aversion is showing signs of moderating. That's linked to a perceived calming of the headwinds facing the stock market.
"In particular, concerns have lessened over the macro environment and central bank policy, reflecting a growing view that the economy may see a 'soft landing' whereby a recession can be avoided despite higher interest rates," Williamson said in the report.
Several economic indicators have been flashing optimism as well. On Tuesday, the S&P Global Flash U.S. Composite showed a softer contraction in demand. It also showed an increase in production in the service sector. In manufacturing, the index showed the mildest decline in four months.
As investors shift to growth sectors in the stock market, real estate lags among institutions' preferred sectors for 2023, while energy and health care are favored, followed by financials, the survey found.
Cyclicals are returning as well. Consumer discretionary, industrials and basic materials are back in favor due to reduced recession fears, while the outlook for tech has reversed upward sharply from January lows.
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