Managers’ Risk Appetite Bounces Back Sharply in February

Investment managers’ risk appetite bounced back sharply in February, as they now see the U.S. macroeconomic environment as its most supportive for equities in more than two years, according to S&P Global’s Investment Manager Index, which surged to 13% in February from -4% in January.

“Investor concerns over a reduced stimulus to equities from fewer central bank rate cuts have been trumped by expectations of improving corporate performance on the back of brighter economic prospects,” said Chris Williamson, executive director at S&P Global Market Intelligence, in a release, adding that “the tech sector in particular has regained investor favor.”

However, Williamson added, “as equity markets test new highs, concerns over valuations have limited investor expectations of further near-term market gains, and the possibility of rates staying higher for longer has dented appetite for real estate and financials.”

The index’s survey is based on monthly replies from a panel of about 300 respondents working for firms that represent approximately $3.5 trillion in assets under management combined.

S&P Global noted that the rebound is in sharp contrast to just a few months ago, when the U.S. economy was seen as a net drag on equities. While the broader global economy is seen as a negative for U.S. equities, according to S&P Global, this perception has moderated to its lowest level in almost a year due to the reduced risk of recession, particularly in Europe.

The survey also found that investors are expecting contributions to equity performance in the near term from shareholder value and equity fundamentals to greatly improve and that corporate performance will also rally due in part to the economic environment strengthening. As a result, the survey showed that earnings estimates for the next quarter have been revised upward for the first time in more than two years.

The improvement in risk sentiment, according to S&P, comes despite central bank policy now being perceived for the first time in three months as weighing down equity returns, when just last month it was seen as the biggest driver of returns. S&P attributed the abrupt change to investors pulling back their expectations of when the Federal Reserve will begin cutting interest rates; they now expect fewer cuts, which will come later in the year.

Because of investors’ lowered expectations for rate cuts, the real estate sector is now the worst-performing sector in terms of investor sentiment, while financials also saw a big drop in sentiment, according to the survey.

On the other end of the spectrum, health care topped investor sentiment for the third month in a row, while the tech/IT sector saw the biggest improvement, as investor sentiment swung in February to its highest point since November 2021 from a negative position in January. Sentiment also rose sharply for communications services.