Despite the fresh highs that the S&P 500 index has made in the last few weeks from its April lows, experts predict that there is more room for the index to rally, as the institutional investors have missed the rally.
What Happened: The chief market strategist at Carson Research, Ryan Detrick, highlighted the chart shared by JC Parets, the CEO and Founder of All Star Charts, which compared the S&P 500 index’s returns with the net positioning of asset managers and hedge funds.
The chart showed clear divergence in the returns, indicating that the S&P 500 was higher than the net positioning of these institutional investors.
Detrick said that the chart “shows hedge funds and asset managers have missed this rally,” but added that “There are pockets of optimism, but this likely says this rally has plenty left in the tank.”
To this, Parets replied by saying, “What do you think these folks are so scared about? It’s odd.”
This divergence is most likely the outcome of the institutional investors parking their money elsewhere. This is evident from the money market funds, which hit a record of $7.4 trillion recently.
During volatile times, investors increasingly favor money market funds or cash equivalents, a clear sign of heightened caution amid ongoing economic uncertainty and fluctuating interest rate outlooks.
Not only Detrick and Parets, but Fundstrat's Tom Lee also said that most of his institutional clients "hate" the V-shaped recovery from April lows, as over $7 trillion of liquidity parked in the money markets has made the investors wary of the current up move in the stocks.
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However, Lee’s views were aligned with Detrick’s that there was more upside to the rally. According to Lee, once the Fed starts cutting rates, the markets are poised for further upside.
Why It Matters: Even though many institutional investors weren’t part of the recent rally, billionaire Bill Ackman, the founder and CEO of the hedge fund Pershing Square Capital Management, L.P., said that he was bullish on the money market funds hitting a record.
Ackman's stance reflected optimism, suggesting this capital could flood into equities if interest rates drop. This was supported by historical data from 40 years showing that a rate cut follows solid gains for the S&P 500 over one to three years, as highlighted by Forbes.
However, the Federal Reserve and its Chair Jerome Powell remain unfazed and continue to be in the "wait-and-see" mode as the June Fed minutes, released last week, mentioned the words "uncertain" and "uncertainty" around 28 times.
The possibility of a tariff-induced inflation has kept some Federal Open Market Committee members on hold, while some participants are ready to start cutting again.
Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, were higher in premarket on Tuesday. The SPY was up 0.33% at $626.89, while the QQQ advanced 0.56% to $559.35, according to Benzinga Pro data.
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