Sympathetic as I (pretty plainly) am to the bear case for an equity market trading up 20% from the lows on a rich multiple and very poor breadth, I have to concede the scope for upside based, if nothing else, on the trillions in sideline cash and the notion that some discretionary cohorts are likely still under-positioned.

Elevated cash allocations were a fixture in 2022, and the first half of 2023 was defined by a rapacious grab into money market funds. How long will it be before that cash starts to worry about underperforming stocks? Put differently: Is 5% enough to compensate for the terrifying prospect of missing a potential dot-com-esque bubble run for an equity market gone A.I.-crazy?

On the equity flows side, US stock-focused ETFs and mutual funds came into the A.I. mania bleeding on net (i.e., the outflow from mutual funds easily outstripped inflows to exchange-traded products). Over the past two weeks, though, the tide turned.

After taking in more than $13 billion the prior week, US stock funds got a half-billion more during the latest weekly reporting period, a small inflow to be sure, but an inflow nevertheless.

Notably (and consistent with several sessions of big outperformance for the Russell 2000), US small-cap funds took in $3.7 billion, offset by outflows from large-cap-focused products and a sizable exodus from value.

Here’s the thing: You could argue that inflows to IG bonds “should” be accompanied by inflows to equities. Although the renewed interest in US-focused funds helped stanch the bleeding from DM products, YTD outflows from developed market funds are still negative to the tune of $40 billion. It’s EM-focused funds that’ve kept equity flows positive on net.

All in all, the flat-ish trajectory of equity flows stands in stark contrast to the ~$100 billion that’s gone into IG bonds, as illustrated by the figure on the right below.

“A market truism [says] when investors love IG bonds, stocks do well,” BofA’s Michael Hartnett wrote, in the latest installment of his popular weekly Flow Show series.

As the figure on left above shows, there’s nearly $8 trillion sitting in global money market funds, up from ~$5 trillion pre-pandemic.

“Investors on balance [are] still bearish macro and markets and outside of cash [are] exclusively committed to high-quality ‘chicken cyclicals,’ like corporate bonds and tech,” Hartnett went on. “Positioning remains the BFF for risk assets.”