Morgan Stanley executive: The enthusiasm of retail investors for popular stocks keeps me "awake at night"
Data shows that by the end of January, the stock exposure of retail investors in the U.S. stock market has reached the 96th percentile, the highest level recorded since 1997. The sentiment of retail investors even exceeds the levels seen during the "meme stock" frenzy in 2021. Executives at Morgan Stanley believe that this kind of enthusiasm typically occurs at the end of a bull market
Recently, retail investors in the U.S. stock market have shown high enthusiasm, with funds pouring into high-risk areas, which is considered a "danger signal" indicating that a bull market is nearing its end.
On February 19, Andrew Slimmon, a senior portfolio manager at Morgan Stanley Investment Management, stated in a media interview, "What keeps me awake at night is the retail investors' frenzied pursuit of popular stocks. This kind of frenzy usually appears at the end of a bull market, and we are rapidly entering an optimistic phase."
Data from Barclays Bank's equity strategy department shows that as of the end of January, retail investors' stock exposure has reached the 96th percentile since records began in 1997. Emma Wu from JP Morgan pointed out that retail investor sentiment has also reached an all-time high, even surpassing the levels seen during the "meme stock" frenzy in 2021.
The chart below shows the trend of retail net purchases as a percentage of the total market capitalization of U.S. stocks:
The ARK Innovation ETF (ARKK), which tracks unprofitable tech stocks, has risen about 20% in the past three months, while Palantir Technologies Inc., favored by retail investors, has soared nearly 50% this year.
Despite the S&P 500 index approaching historical highs, market risks remain significant. Trade tensions, the Federal Reserve's intention to maintain high interest rates, and whether large U.S. companies can convert substantial investments in artificial intelligence into profits all contribute to market uncertainty.
Slimmon believes that the Federal Reserve's "wait-and-see" stance helps to cool down market enthusiasm, stating, "I would be very happy if the market could calm down a bit."
Looking back over the past two years, the S&P 500 index has achieved double-digit returns. Slimmon expects that market volatility will become the norm by 2025. As many investors entered the market at high levels, they are more likely to hit the "panic button" and sell stocks at the first sign of adverse news.
"This is why the third year often sees greater volatility and lower returns," Slimmon explained, "but if the buying frenzy for these quantum AI stocks is not so strong, the likelihood of deeper shocks will decrease."
Despite concerns about the short-term market outlook, Slimmon is not entirely pessimistic; he believes there are still investment opportunities beyond the large tech giants that have driven the stock market up over the past two years. At the beginning of this year, the so-called "seven giants" stock index only rose by 1.2%, indicating a slowdown in growth.
One area Slimmon is optimistic about is the financial sector. "I'm not betting on these (tech) stocks to go down," he said, "I believe a broader market rally is healthy."
It is worth mentioning that Slimmon accurately predicted the upward trend of the S&P 500 index over the past two years, and even when most Wall Street forecasters expected a market decline in 2023, he still urged investors to buy