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“Despite lower volatility and greater depth of book driving the most favourable trading conditions in US equities for over 18 months, the majority of institutional investors remain on the fence. In anticipation of several seminal market events, including another likely rate hike and results season, investors are broadly in ‘wait and see’ mode – keeping high cash piles on the sidelines.
“Q3 earnings will be crucial in resolving the tug of war between bulls and bears. They will act as the acid test that will show whether the stock market is overvalued or whether valuations are in line with corporate expectations. This could break investor deadlock – revealing the underlying performance of US corporates while pushing investors to increase conviction and take advantage of the strong trading conditions.”
“As institutional investors take a cautious approach, we are seeing the opposite in the retail market. Since the pandemic, the simple act of retail flows following performance is highly correlated. With major equity indexes at highs for the year, the retail component as a volume source remains high, but pushes volume off-exchange and largely non-institutionally available. And along those lines, similar to institutions, ETF’s provide a very attractive and clean way to get in and out of a strategy or a macro market bet in one security. ETF volumes can push to 40%+ of total U.S. equity volumes, while hurting the liquidity and health of the broader market. With that backdrop, single stock entry/exit remains volume starved.”
“The next few weeks and months will set the scene for the rest of the year in US equities – as rates are anticipated to hit their peak in the current cycle and new data floods markets. These factors could spur investors to deploy significant amounts of capital in US equities and cause a shift in liquidity conditions.”
