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(Bloomberg) -- The S&P 500’s recent leg higher has been missing an important ingredient: inflows from big-money managers. For those betting on a further rally, that’s a welcome development.
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As the benchmark gauge inched higher so far in January, institutional investors reduced their bullish wagers amid uncertainty about President Donald Trump’s policies and the Federal Reserve’s interest-rate path. A measure of aggregate positioning among rules-based and discretionary investors fell to a two-month low, according to Deutsche Bank AG’s data. And commodity trading advisors cut their long stock exposure to the level last seen in the aftermath of a market rout in August, data compiled by Goldman Sachs Group Inc.’s trading desk show.
From a contrarian perspective, such skepticism bodes well for stock-market bulls because it means more dry powder to buy equities down the road, should the biggest fears fail to materialize. While political uncertainty weighs heavily on investor sentiment, inflation has been subsiding and fourth-quarter earnings season is off to a strong start.
“Positioning is not reflective of the current rally in risk assets and may cause some FOMU, or fear of materially underperforming, the benchmark,” Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs wrote in a note to clients Wednesday. “We have a favorable technical window for the next one month,” he added.
Money managers’ caution comes as the S&P 500 is hovering steps away from a record, while investors assess corporate earnings and the latest policy announcements from Trump for clues on the stock market’s next move.
The upcoming week will be crucial for Wall Street, with investors awaiting the latest interest-rate decision and a batch of earnings reports from technology giants including Microsoft Corp., Tesla Inc. and Meta Platforms Inc. The S&P 500 jumped above 6,100 for the first time ever on Wednesday, before paring its advance at the close.
If the benchmark index keeps moving higher or even stays flat, commodity-trading advisors may put between $15 billion and $30 billion into the stocks over the next month, Rubner wrote in the note to clients.
A respite in volatility is also seen as a tailwind for the stock market as another type of systematic strategy, Volatility control funds, typically adds exposure when realized volatility drops.