Investors still diving into US equities with valuations at record highs

Money is pouring into the US stock market at the fastest pace since 2015, even as valuations sit close to all-time highs and investors worry that higher inflation could push the US Federal Reserve to tighten monetary policy.

Since February, US equity funds have experienced a net $189bn in flows, a “significant push,” said Cameron Brandt, director of research at EPFR, the company that compiled the data.

Strong growth expectations, lower interest rates, higher spending from consumers and increasing vaccination rates in the US have renewed investors’ faith in the US economy, which has supported the increase in flows during the first half of 2021.

Goldman Sachs expects households and corporations to buy $500bn of US equities by the end of the year. 

A significant portion of inflows went to cyclical stocks such as financials, industrials and energy that are seen to benefit from higher economic growth. US small-cap value funds amassed $11bn in inflows in the first five months of 2021, more than any other year in the past decade, according to monthly research run by the Wells Fargo Investment Institute. 

Investors are expected to continue pushing in to US equity funds in the near term but “we expect the journey to be volatile as investors price the possibility of tapering and interest rate increases by the Fed,” said Ken Johnson, an analyst at Wells Fargo.

As the US economy continues to reopen and more people apply for jobs, the next US jobs report on Friday is expected to be stronger, increasing speculation that inflation will climb further.

“We’re still in the camp where we want to be positioned for an economic recovery — commodity and financial stocks and sticking with that procyclical value . . . but balancing that with health and consumer staples,” said Eddie Perkin, chief investment officer of equity at Eaton Vance, a fund manager. 

However, some institutional investors are looking to trim their equity exposures to reduce risk because of the high valuations.

“There’s already been a bit of rotation away from growth stocks, which are traditionally higher multiple towards value, which is lower . . . I think there could be more of that to come, but from our perspective it would be pretty generic,” said Amy Falls, chief investment officer at Northwestern University’s endowment. “Just bring equity risk down rather than certain sectors.”

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