Diminishing Risks and Fear of Missing Out May Stimulate US Stocks After a Near 20% Increase

The concerns that have haunted American markets for months are dissipating, leading some Wall Street companies to upgrade their forecasts for stocks and luring investors that have been sitting on sidelines.

The benchmark S&P 500 has increased over 20% from its October low, one indication of a bull market, as a result of signs of economic resilience, relief over a deal to lift the US debt ceiling, and an interest rate increasing cycle that might be reaching its end.

Whether investors drastically reduced their stock allocations during the past year decide to re-enter the market could determine whether there are additional gains. There is a lot of money lying around: According to the most recent study, assets held by U.S. money market funds this month reached a fresh high of $5.8 trillion, while cash holdings among international fund managers are still high by historical standards.

In addition, Deutsche Bank found that positioning of discretionary investors, a group that includes active mutual funds and retail investors, is lighter compared to it has been 74% of that time since 2010, despite the fact that computer-driven solutions have been flooding the market for months.

Chuck Carlson, CEO of Horizon Investment Services, said that the market certainly seems to have a bit of an optimistic ring to it and for fear of missing out, further strength may generate further strength.

Dissipating risks

After spending months preparing for a recession that was widely anticipated, investors are optimistic in part because to the US economy's stronger-than-expected performance.

The case for those who believe the Fed can control inflation without seriously harming GDP is strengthened by data released on Friday that showed US job growth surged in May, despite the jobless rate rising to a seven-month high.

In a recent report, Brian Belski, chief investment strategist at BMO Capital Markets, said that despite the obvious decline in inflation, the strength of the labor market had not changed.

At the beginning of the year, a serious recession was his major concern; but, at this point, the expected recipe for disaster is just not present.

BMO increased its S&P 500 price prediction for the year to 4,550 from 4,300. The index, which has gained 11% so far this year, ended Wednesday at 4,267.52. Since October 12, it has increased by 19.3%.

Evercore ISI, which now expects the S&P 500 to reach 4,450 at year's end, up from its previous projection of 4,150, and Stifel, which believes the index will rise to 4,400 by the third quarter, are two other companies that have recently released optimistic targets. BofA increased its year-end prediction for the index late last month from 4,000 to 4,300.

When Congress approved a package to postpone the debt ceiling last week, a potentially disastrous U.S. default was avoided, eliminating another significant risk.

According to co-chief investment officer at Truist Advisory Services, Keith Lerner, getting through the debt ceiling or at least seeing some economic data which looks decent is enough to pique some people's attention.

On Monday, Lerner raised his forecast for the S&P 500 to 3,800-4,500 from 3,400-4,300, citing improved earnings patterns among other things.

Meanwhile, signs that the Fed won't be delivering many more of the rate rises that have roiled markets over the past year have encouraged investors. Investors predicted that the Fed will hold interest rates steady and increase them just once more this year at its monetary policy meeting on June 13 to14, according to bets in futures markets.

Of course, there are still a lot of doubters.

The S&P 500 might test its October lows again, according to John Lynch, chief investment officer at Comerica Wealth Management, as the rest of the year's economic activity will be hampered by high interest rates and stricter credit requirements.

Another alarming indicator is the fact that only a small number of megacap stocks, including Microsoft and Nvidia, have contributed significantly to the S&P 500's gain this year, while the majority of the market has been stagnant. These stocks have been boosted in part by investor excitement over developments in artificial intelligence.

That is unsettling news for Hans Olsen, the chief investment officer of Fiduciary Trust Co. Recession risks. In Olsen's opinion, signals like inverted yield curve indicate that risks remain pretty high, which is why his company is keeping its cash levels higher than usual.

In a down market that hasn't completely ended, he remarked, they have one strong rally.