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Dissipating risks and economic strength encourage optimism in US stock market

Published 08/06/2023, 04:40 pm
© Reuters

Investing.com - As uncertainties that have weighed on US stocks for months begin to dissipate, Wall Street firms are increasingly optimistic about equities, potentially enticing hesitant investors back into the market. Factors such as a robust economy, an agreement to raise the US debt ceiling, and a possible end to the interest rate hiking cycle have contributed to this renewed investor confidence. As a result, the S&P 500 has risen nearly 20% from its October low - meeting one definition of a bull market.

The potential for further gains may rely on whether those who reduced their stock allocations over the past year decided to re-enter the market. There is ample cash available for investment; US money market fund assets reached a record $5.8 trillion last month while global fund managers' cash levels remain historically high, according to BofA Global Research.

Although computer-driven strategies have been entering the market consistently in recent months (as per Deutsche Bank (ETR:DBKGn)), discretionary investor positioning remains lower than since 2010. Chuck Carlson from Horizon Investment Services notes that "further strength might beget further strength because of the FOMO factor" - suggesting that fear of missing out could motivate more reluctant investors.

One reason behind increased optimism among investors is the strong performance of the US economy despite earlier fears of recession. Recent data showed accelerated job growth in May alongside an increase in unemployment rates - supporting expectations that inflation can be managed without significant harm to growth prospects.

Several Wall Street firms have issued positive outlooks lately; Evercore ISI now predicts an S&P 500 level at year-end up from its previous estimate while Stifel anticipates reaching higher levels by Q3 this year. BofA also raised its target index value late last month after Congress passed legislation to suspend the debt ceiling and avoid a potentially disastrous US default.

Nevertheless, skeptics remain. Some believe that elevated interest rates and tighter credit standards could still negatively impact economic activity for the rest of the year, while others point out that gains in the S&P 500 have been driven primarily by a few mega-cap stocks like Microsoft (NASDAQ:MSFT) and Nvidia - leaving large portions of the market underperforming. Despite these concerns, current conditions suggest there may be room for cautious optimism in US stock markets as sidelined investors consider re-entering.

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