Investing.com -- Investor sentiment on U.S. stocks is waning despite stabilization in the S&P 500, according to RBC Capital’s Lori Calvasina.
The bank’s head of U.S. equity strategy noted that the latest American Association of Individual Investors (AAII) survey shows that "the bears now exceed the bulls by a wide margin," with the four-week average for net bulls at -3.3% as of January 16, 2025, and a weekly data point falling to -15.2%.
Calvasina highlights that while the current stock market malaise "may not be done yet," the reduction of froth in investor sentiment improves the setup for equities over the next 6-12 months.
Despite the bearish sentiment, some "green shoots for business confidence" are emerging, says RBC.
They explain that the latest Philly Fed survey showed a surge in capex expectations, suggesting business sentiment is improving. Similarly, the Small Business Optimism Index reported by the NFIB for December is nearing past peaks, though small business uncertainty remains elevated.
RBC also points to shifts in fund flows as indicative of investor sentiment.
"US equity funds flows continue to show a loss of momentum," while there is a notable bounce-back in U.S. bond fund flows.
Additionally, global equity and non-U.S. equity funds are said to be seeing improved trends, with strong inflows returning to several non-U.S. developed market categories.
Within U.S. equities, both growth and value funds are experiencing outflows, and small-cap equity flows have turned negative, according to the bank.
However, actively managed small-cap funds have seen positive inflows, suggesting a nuanced investor approach. Defensive funds, including dividend-focused and low-volatility options, are also seeing improved trends.
Calvasina concludes that while investor sentiment is currently subdued, the improving business sentiment and shifts in fund flows could bode well for U.S. equities in the longer term.