Investors Drive $60 Billion From Retail-Focused Equity Mutual Funds But Goldman Sees Sentiment Shift

Individual investors have driven $60 billion out of retail-focused equity mutual funds so far this year but they also have the most potential to buy stocks in the second half of the year as sentiment among the group begins to shift, Goldman Sachs said.

Equity funds have had net outflows of $35 billion this year, as inflows of $35 billion into US passive mutual funds and exchange-traded funds couldn’t match the $70 billion of active mutual fund outflows, the investment bank’s analysts including David Kostin and Ben Snider said in a note emailed Monday.

“History shows that retail sentiment tends to trail equity market performance,” the analysts said. “This explains that retail investors have been net sellers YTD [year to date] because of the market decline during 4Q.”

The recovery in the equity measures this year means that if there’s no “imminent downturn,” retail investors will probably buy stocks in the latter half. The Standard & Poor’s 500 benchmark hit a record high at the end of April, although the measure has given back gains in recent days amid trade tensions between the US and China.

Foreign investors, mutual funds and pensions have also sold US stocks this year, Goldman said, while corporations, asset managers and systematic funds have been the biggest buyers. Foreigners could be another source of demand for stocks, but the bank sees pension and mutual funds remaining as net sellers.

“In general, there is limited combined firepower to buy stocks since allocation to equities across major investors is near its all-time high,” the Goldman analysts said. “From a positioning perspective, there appears to be only modest potential upside for equities.” They predicted a rise in the S&P 500 to 3,000 by the end of the year; the market closed at 2,881.4 on Friday.

Goldman also said that the heavy activity in initial public offerings won’t offset the push that is coming from corporate stock repurchases, which they see as the largest source of demand in 2019.

“A rise in gross buybacks ($940 billion for the S&P 500) will be only partially offset by a potentially record-breaking year for IPOs,” the analysts said.

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