Analysis- Disappearing risk and fear of missing out could fuel US stocks after nearly 20% rally

By Lewis Krauskopf

NEW YORK (Reuters) – Worries that have dogged U.S. stocks for months are fading, prompting some Wall Street firms to raise their outlook for stocks and inviting investors who have stayed away.

Signs of strength in the economy, relief from a deal to raise the US debt ceiling and an interest rate hike cycle that may be coming to an end buoyed investors and lifted the index benchmark S&P 500 nearly 20% from its October low – a definition of a bull market.

Further gains could hinge on whether investors who have wiped out stock allocations over the past year return to the market. Margin liquidity is plentiful: U.S. money market fund assets hit a new record high of $5.8 trillion last month, while global fund manager liquidity levels remain high by historical standards , according to the latest BofA Global Research survey.

And while computer-driven strategies have been piling up in the market for months, according to Deutsche Bank, positioning among discretionary investors — a cohort that includes everyone from active mutual funds to retail investors — is more lighter than it has been 74% of the time since 2010, bank data showed.

“There certainly seems to be a bit more bullish ring in the market,” said Chuck Carlson, managing director of Horizon Investment Services. “Additional strength could beget extra strength because of the FOMO factor,” he added, using the popular acronym for “fear of missing out.”


A stronger-than-expected US economy is one reason for investor optimism, after many months of preparing for a widely expected recession.

Friday’s data showed U.S. job growth accelerated in May, even as the jobless rate hit a seven-month high, bolstering the arguments of those betting that the Fed can contain inflation without seriously harming growth.

“Inflation has clearly declined, yet labor market strength has remained intact,” BMO Capital Markets chief investment strategist Brian Belski wrote in a recent note. While a severe recession was its biggest worry at the start of the year, now “the predicted recipe for disaster simply isn’t there.” BMO raised its year-end S&P 500 price target to 4,550 from 4,300. The index, which is up 11% year-to-date, closed at 4,267.52 on Wednesday. It is up 19.3% since October 12.

Evercore ISI, which now sees the S&P 500 at 4,450 at the end of the year, from 4,150 previously, and Stifel, which expects the index to hit 4,400 in the third quarter, are other companies that have published promising goals in recent days. BofA late last month raised its year-end target for the index to 4,300 from 4,000.

Another key risk dissipated last week when Congress passed a bill to suspend the debt ceiling, averting a potentially catastrophic US default. “Breaking the debt ceiling and at least having economic data that looks good is actually enough to interest some people,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. Lerner on Monday moved his expected S&P 500 range for this year to 3,800-4,500 from 3,400-4,300 previously, citing improving earnings trends, among other factors. At the same time, investors have been encouraged by signals that the Fed is unlikely to carry out much more of the rate hikes that have rattled markets over the past year. Futures betting showed investors expected the Fed to leave rates unchanged at its June 13-14 monetary policy meeting and only raise them once more this year.

Of course, many skeptics remain. John Lynch, chief investment officer of Comerica Wealth Management, said the S&P 500 could retest its October lows with “high interest rates and tighter credit standards weighing on economic activity for the rest of the year”. Another worrying signal is the fact that the S&P 500’s gain this year has been boosted by only a handful of megacap stocks like Microsoft and Nvidia, which have been fueled in part by enthusiasm for the progress of the artificial intelligence, while large swaths of the market languished. . For Hans Olsen, chief investment officer at Fiduciary Trust Co, this is a worrying sign. Olsen believes signals such as the inverted yield curve show that recession risks remain “pretty high” and that his company is maintaining cash levels above usual levels. “We have a strong rally in a bear market that hasn’t been fully resolved yet,” he said.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Diane Craft)

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