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Stock Investors Have Just Gotten More Bullish

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U.S. stock investors are getting much more bullish on stocks. That doesn’t mean the market is without risks, but several factors point to support to the equity market for some time.

The S&P 500 is up more than 50% since the March 23 bear market low, in a move driven hard by historic market outperformance of growth tech stocks. Still, without those stocks, the S&P 500 would be up dozens of percentage points, as value stocks have enjoyed the momentum of the V-shaped economic recovery. On Monday, a broad sector S&P 500 rally included consumer discretionary, manufacturing, oil, and banking, which enjoyed an aggressively expanding yield curve.

"Those describing themselves as bullish or very bullish rose in our latest survey, from 42% in June to 50% in September,” wrote RBC Capital Markets Chief U.S. Equity Strategist Lori Calvasina in a note.

RBC said its survey showed about 50% of investors surveyed in the third quarter see strong returns on the S&P 500 for the next year, with 6% of respondents saying they are “very bullish.” The 50% is, though, is up from closer to 40% in the second quarter. Those bearish were about 20% of the survey, flat quarter-over-quarter. Those who are neutral dipped a bit so yes — it does seem that divergence of opinion became incrementally more of theme in the past quarter.

Morgan Stanley U.S. stock market strategists report a similar sentiment. In recent research, Morgan Stanley says the net long position on U.S. stocks among institutional investors is about 70%. That’s a total long position, net of short positions. That ratio usually averages around 60% in the past several years.

As investors continue to position for a continued V-shaped recovery, pricing in a bit more economic demand and inflation (the 10-Year Treasury yield is up to 0.76% from 0.66% less than a week ago), “views on the U.S. economy improved once again in our 3Q20 survey,” Calvasina wrote. In the third quarter, 58% of investors told RBC they are bullish on the economy for the next 6-12 months, up from 43% in the second quarter. Bears went from 40% to 30%.

For the very near-term, both Morgan Stanley and RBC do point out market risk is magnified. Regarding the net long number, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson wrote, "What this tells us is that if volatility stays high and markets remain trendless, these exposures are likely to fall over the next month. That means lower equity prices before the correction is over.” And Calvasina said more than 60% of respondents in Q3 think valuations in the U.S. are overstretched, up from just below 60% in Q2. Those who view valuations as attractive were stable at just below 15%, while those neutral dipped.

These dynamics mean that economic risks, like more virus cases, new lockdowns or insufficient fiscal stimulus could create meaningful downside, if valuations are indeed overstretched. Election risks have increasingly become centered on ballot-counting, which is a near-term risk. Investors have digested that policy changes are likely not to be drastic as Congress may be composed fairly equally of Republicans and Democrats.

For the intermediate-term, slightly elevated levels of cash holdings and increasing bullish sentiment may very well provide a notable level of support to price in the market. 

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