Markets have staged a strong rally since the U.S. presidential election, with prices of everything from technology and manufacturing giants to cryptocurrencies rising sharply, and many investors believe the market has further room to rise.
U.S. stock ETFs and mutual funds attracted nearly $56 billion in inflows in the week ended last Wednesday, the second-largest weekly inflows on record since 2008, according to EPFR data. Such funds have attracted inflows for seven consecutive months, the longest streak since 2021, when the market's sharp rise pushed stock prices to multiple all-time highs.
Driving the optimism? Many investors said they expect lower taxes and less regulation under a second Trump term.
Dominic Rizzo, technology portfolio manager at T. Rowe Price, said the tariffs could boost U.S. manufacturing, driving a surge in domestic spending and investment.
According to a survey by the American Association of Individual Investors, the percentage of investors who said they were bullish jumped to 49.8% last week, while the percentage of investors who said they were neutral fell to the lowest level since 2022. About 40% of respondents said the U.S. election made them more optimistic about the market.
“The animal spirits are very much alive right now,” Rizzo said.
Many investors have piled into sectors of the market that are particularly sensitive to the economy, such as small-cap stocks.
The Russell 2000 has gained nearly 2% since the election, and one of the largest ETFs tied to the index attracted $3.9 billion in inflows in a single trading day this month, the most since June 2007. At the same time, money managers added to their long positions, pushing net long bets in futures markets to the highest level in more than four years.
Some say stocks look expensive after their recent gains. The S&P 500 is trading at 22 times expected earnings for the next 12 months, above its average of about 20 times over the past five years. Bank of America strategist Savita Subramanian called market sentiment "dangerously bullish" in a note to clients Friday.
Bond investors sent mixed signals, pushing the benchmark 10-year Treasury yield to 4.426% on Friday as they bet on bigger deficits and higher inflation in the years ahead.
A closely tracked measure by investors -- the equity risk premium, or the difference between the S&P 500's earnings yield and the 10-year Treasury yield -- is near zero, the lowest level since 2002, according to Dow Jones Market Data. That means the returns from holding stocks relative to bonds are diminishing.
“The market is already very expensive and is unlikely to continue to rise significantly,” said Rob Arnott, founder and chairman of Research Affiliates.
Article forwarded from: Jinshi Data