Stocks are in an “optimism phase.”
You can tell because they’re going up.
But also because, as Goldman’s Christian Mueller-Glissmann and Cecilia Mariotti wrote in an asset allocation update, valuations are rising “despite muted earnings growth and a late-cycle setup with rising yields.”
What accounts for that? Well, a lot of things, but Mueller-Glissmann called the A.I. narrative “a key trigger,” even as he acknowledged that the odds of a soft landing have improved.
At the same time, receding volatility has pulled investors off the sidelines, some begrudgingly (the discretionary crowd), others mechanically (systematics).
Positioning and sentiment are hot topics during these record-hot days of ours (on the off chance you haven’t noticed, the world is shattering all manner of heat records this summer). For a time, under-positioning was a bull’s best friend. It meant room to run on any capitulation from investor cohorts who could no longer afford to stay on the sidelines.
At this point, though, a lot of that “force-in” dynamic has run its course. As discussed in the latest weekly+, one bank’s measure of consolidated positioning is now in the 68%ile looking back a dozen years, and US equity flows continued to inflect+ over the latest weekly reporting period.
For those interested, the figures below offer some additional context. Goldman’s positioning and sentiment indicator is now out ahead of the global composite PMI, as shown on the left.
The figure on the right gives you a sense of how various indicators look now versus one and three months ago.
“The largest shifts have been in more optimistic investor surveys, options markets and our Risk Appetite Indicator,” Mueller-Glissmann and Mariotti remarked.
They pointed out that the RAI has also pulled ahead of the services-only PMI, a notable development in the current macro context. Conceptually: Risk appetite now exceeds one measure of the activity impulse in the strongest sector of the global economy, to say nothing of the recessionary levels where manufacturing PMIs are still mired.
Does stretched risk appetite presage a selloff? Well, no. Not necessarily. But it does suggest less scope for right-tail outcomes, almost by definition.
“An elevated RAI is not a bearish signal per se [but] the asymmetry to add risk is still worse and the market can be more vulnerable in the event of disappointments,” Goldman’s asset allocation team went on to say, before offering a word of caution on both sides of the debate.
For the bears among you, Mueller-Glissmann noted that risk appetite “can stay elevated for prolonged periods as long as the macro backdrop remains supportive.” So, “irrational longer than you can stay solvent” or at least longer than you can stay on the sidelines without clients fretting about underperformance.
For the bulls, Goldman cautioned that although a soft landing with normalizing inflation is still the bank’s base case, “late-cycle risks are lingering and risk premia have compressed.”
The bank is neutral on commodities, credit, equities and bonds in the near-term (three months), and Overweight raw materials on a 12-month horizon. The only “asset” they’re Overweight on both horizons: Cash.
