After months of heavy caution over the state of the U.S. stock market, investors appear to be warming up to the future prospects of equities despite lingering uncertainty surrounding trade policy and other factors.
According to a quarterly survey conducted by E*Trade, 57% of active managers describe themselves as bullish on the market. That represents a rebound from the previous quarter, when 52% of respondents described themselves as such, a two-year low. In the poll conducted during the first quarter, fully 68% of managers said they were bullish, an unusually high level.
The report, conducted earlier this week, also indicated optimism about the market’s shorter-term prospects. More than half the managers—52%—expect the market to end the third quarter in positive territory, while just 25% expect it to end lower by at least 5%.
Thus far this quarter, which just started at the beginning of July, the Dow Jones Industrial Average DJIA, +0.39% is up 3.1% while the S&P 500 SPX, +0.10% is up 3.1% and the Nasdaq Composite Index COMP, +0.01% is up 4.1%.
High levels of optimism are sometimes be interpreted as a bearish signal, as it can be a sign of investor complacency, but managers are hardly expecting gangbuster results over the coming 2 ½ months. The vast majority of those who expect the third quarter to be a positive one see only limited gains. About 1 out of three respondents expect it to rise about 5%, while another 13% see gains of 10%. The ratio expecting a decline of 5% came in at 17%.
While the results were close, managers said that information technology stocks offered the most potential in the current quarter, with 45% putting the industry in its top three sectors. Should this prove accurate, it would extend the sector’s recent dominance, as it has accounted for nearly all the market’s year-to-date gains, and it hit a record this week.
The tech sector was followed by energy (42%) and both health care and financials (tied at 41%). The two consumer sectors—staples and discretionary—came in at the bottom, with just 19% of investors putting each in their top three.
The improved view by investment managers come as markets have recently been trending higher, despite a midweek blip on fresh The Nasdaq closed at a record on Thursday, and both the Dow and the S&P are on track for their sixth daily gain of the past seven sessions. Those gains have come on the back of improved economic data, particularly on the labor market, as well as optimism that the second-quarter earnings season would outperform, reflecting solid macroeconomic drivers prevailing in the U.S.
While trade remains a big question for investors, there have recently been some reasons for optimism, including reports that Washington and Beijing are willing to resume trade talks, which market participants hope could end in a bilateral agreement and avoid a trade war.
“Trade has acted like a wet blanket on the stock market, but the fundamentals remain strong. If we can get through this issue, the earnings growth story is positive enough to lift markets,” said Anthony Saglimbene, global market strategist at Ameriprise Financial.
According to the latest AAII Investor Sentiment weekly survey, 43.1% of investors describe themselves as bullish, meaning they expect prices to be higher in six months. That represents a jump of 15.2 percentage points from the previous week, enough to put the reading back over its long-term average of 38.5%. Meanwhile, the number of investors who describe themselves as bearish tumbled by 10.1 percentage points to 29.2%, returning below its historical average of 30.5%.
Perhaps most notably, the ratio of investors who describe themselves as neutral on the market fell by 5.1 percentage points to 27.8%, snapping a 20-week stretch where this reading was above its long-term average of 31%. That 20-week stretch of unusually high neutral sentiment has coincided with a similarly long period of rangebound trading in the major indexes.
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