Are US Stocks Inflated? Fund Managers Say So

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Fund managers are not optimistic about the US market: A record 91% said in a recent survey that stocks are overvalued.

That doesn’t mean that they’re exiting equities, Bank of America found in its August Global Fund Manager Survey. Cash allocations are at a low 3.9% of assets under management, and equity allocations are trending upward. On average, fund managers are 14% overweight on global equities, according to the report, and advisors told ETF Upside that the findings are hardly an indictment of the US stock market in its entirety.

“If history has taught investors anything, it’s that ‘the market’ is rarely the monolith we make it out to be,” said Patrick Huey, owner of Victory Independent Planning.

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Did I Break Your Concentration?

A culprit behind the overvaluation is the Magnificent Seven, whose members make up only a fraction of publicly traded companies but have outsized market caps. Market cap weighting, consequently, is skewing averages higher, and big tech firms may represent less of a value than, as Huey said, “more reasonably priced” public companies. “Those tech titans now make up nearly 30% of the S&P 500’s market capitalization,” he said. Another advisor, Thomas Rindahl, of TruWest Wealth Management Services, noted that “cap weighting of indices can lead to a disproportionate influence and dependence upon the performance of a few companies, which ultimately leads to market vulnerability, if not bubbles.” Of course, this story is not entirely new, and there has been more attention to equal-weight or capped-weight index ETFs recently.

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A couple of those ETFs show the categories’ benefits and limitations:

The iShares S&P 500 3% Capped ETF (TOPC), which launched earlier this year, gives an alternative to the top-heavy index, though its top holdings are still the same big names — Nvidia, Apple, Microsoft, etc. — that are at the top of market-cap weighted funds. The Invesco S&P 500 Equal Weight ETF (RSP) has the benefit of diversification, giving the same weight to every stock, but it has relatively high turnover and volatility, according to a Morningstar analysis.

What, Me Worry? Concentration risk is a cause of anxiety among clients, but so are things like algorithmic trading and the political environment’s effect on portfolios, Huey said. “Beneath it all is the timeless fear of the unknown. Our response is grounded in time-tested principles: Diversify beyond the headline-makers. Stick to a long-term plan.”

This post first appeared on The Daily Upside. To receive exclusive news and analysis of the rapidly evolving ETF landscape, built for advisors and capital allocators, subscribe to our free ETF Upside newsletter.

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