(Bloomberg) -- Investors’ distaste for U.S. stocks has rarely been higher. To Wall Street’s biggest equity bull, it’s nothing to worry about.
Rather, it represents untapped buying power, says UBS equity strategist Keith Parker, whose year-end target for the S&P 500 Index to reach 3,150 is the highest among all strategists tracked by Bloomberg.
Outflows from funds that focus on American equities surged to $100 billion over the past 12 months, data compiled by UBS showed. That’s in stark contrast with $400 billion of money added to those that invest in international stocks. As a result, the gap in flows was the biggest on record.
Even those hanging on have either reduced holdings or gone defensive. The firm’s study on fund positioning showed money managers have cut their exposure to stocks to one of the lowest levels in the past five years.
U.S. equities are losing favor as President Donald Trump’s “America First” policy struck a dissonant tone in a market where price-earnings ratios were about 30 percent above the rest of the world. The deteriorating sentiment means investors are setting themselves for a battle with companies, whose share repurchases have been the biggest ally of this bull market. UBS says that buying is poised to pick up when the earnings-related buyback blackout ends.
Corporate demand will surge to $150 billion in May from an estimated $45 billion this month, UBS data showed. Since 2012, such an increase in appetite has pushed the S&P 500 higher in the ensuing month at double the rate of when corporate buying was least robust.
History is also on the bull’s side when investor sentiment is as dire as now. There have been five other instances since 2005 when equity funds experienced large flows out of the U.S. in favor of the rest of the world. All were followed by American stocks outperforming.
Hedge funds have pared risk after the February selloff, and mutual funds remained neutral on stocks while balanced funds that allocate money among different assets were the most bearish. All included, fund exposure sat at 0.8 standard deviation below historical levels, a reading that has typically corresponded to a 3 percent gain for the S&P 500 over the next 30 days.
“We look for balanced funds to buy as growth delivers” in the second and third quarters, Parker wrote in a note to clients. “Active fund positioning is supportive.”
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