Investors who missed out on this year's unexpected rally seem to be dipping their toes back into the US stock market.
Global fund managers increased their exposure to US stocks this month by a record amount, according to Bank of America survey data going back to 1999. September also marked the first month global fund managers have had an outsized allocation in US equities since last August.
That suggests that investors who watched equities steadily climb higher this year are starting to take their cash off the sidelines and put it into the stock market, some investors say.
The benchmark S&P 500 index has climbed roughly 15% this year, defying Wall Street skeptics' expectations that the market would sink as the Federal Reserve continued to hike interest rates to tamp down inflation.
That's caused some investors to come down with a classic case of fear-of-missing-out, says Saira Malik, chief investment officer at Nuveen. The rally's late summer stall-out, particularly in the mega-cap technology names that have led the stock surge this year, has created an opportunity for investors to buy the dip.
The S&P 500 has fallen 2.4% so far in September after logging a 1.8% loss in August, its second losing month this year. Tech bigwig Nvidia has tumbled roughly 14% this month, Apple declined 7% and Microsoft slipped 2%.
Wall Street also expects that the Fed is nearing the end of its rate-hiking cycle. The data-dependent central bank held rates steady on Wednesday and signaled that it could hike rates once more this year. Traders largely expect the Fed to hold rates steady in November, though they remain split on whether the central bank will hike or hit the pause button again in December, according to the CME FedWatch Tool.
The expectation that the Fed will soon finish hiking rates has in turn brightened the outlook for a possible soft landing, a scenario in which inflation comes down to the central bank's 2% target without causing a sharp economic downturn, according to Malik. Both spending and the job market have stayed resilient this year, playing key roles in supporting the economy through the Fed's arduous rate increases.
"[Investors] were holding their cash saying, 'okay, when the recession comes, I'll put my money back into the market.' Instead, we have not seen a recession," said Malik.
Still, bond yields rose to their highest level since 2007 this week, as investors bet that the central bank will keep rates higher for longer. That could continue putting pressure on stocks, along with spiking oil prices that edged above $90 a barrel last week for the first time in nearly a year.
If those assets keep offering higher returns, risk-averse investors might continue to seek them out as safer investments over stocks — particularly government-backed bonds.
Higher-for-longer rates could also put pressure on tech stocks that have led this year's surge.
"Heading into the fourth quarter with rate expectations remaining elevated, we are more than likely in for a choppy end of the year," said Alex McGrath, chief investment officer at NorthEnd Private Wealth.
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