Bank of America: Institutional investors are withdrawing from US stocks at an unprecedented rate

In the last week of January, institutional investors have been withdrawing from the US stock market at an unprecedented rate, according to Bank of America's client fund flow report. This may indicate that the US stock market has reached at least a recent peak after experiencing rapid growth in the past few months.

Bank of America's institutional clients include mutual funds, pension funds, insurance companies, and banks. The data shows that the amount of funds withdrawn by this group from the US stock market is the largest since 2015 and the second largest since the 2008 financial crisis. Institutional clients have been selling technology stocks and non-essential consumer goods stocks, and they did so before the release of several heavyweight earnings reports this week.

So far this earnings season, the financial performance of companies in the technology and non-essential consumer goods sectors has been mixed.

However, not everyone is pessimistic about the US stock market. While institutional investors are selling US stocks, Bank of America's private clients, namely high-net-worth individuals, and hedge funds are buyers.

Overall, among Bank of America's various client categories, the bears have the upper hand, with a net outflow of funds from US stocks for the first time in three weeks. In terms of investment targets in the US stock market, Bank of America clients sold individual stocks for the first time in eight weeks and bought stock ETFs for the first time in four weeks.

It is worth noting that although there was a large-scale outflow of funds from Bank of America's institutional clients in the past week, the outflow of funds from the stock market in January is consistent with the average level over the past five years as reported by Bank of America.

As for share buybacks, although the pace has slowed down, it is still higher than the usual level for the eleventh consecutive week. So far this year, share buybacks account for 0.29% of the S&P 500 market value, higher than the peak of 0.26% during the same period in 2023.

Bank of America analysts believe that although it is too early to judge people's more cautious attitude towards the US stock market based solely on the aforementioned outflow of funds, it does indicate that sentiment towards the stock market is cooling off after the recent rise in the US stock market.

In addition, there are other indicators that suggest that some investors are taking a temporary break after the S&P 500 index reached a historic high. Bank of America's latest sell-side index shows that the market sentiment is strongly neutral, indicating a lukewarm attitude towards the stock market.This is similar to the signal conveyed by the American Association of Individual Investors (AAII). The AAII sentiment indicator shows that the bull-bear spread has dropped to its lowest point in two months, with individual investors increasingly expressing a "neutral" outlook on the US stock market rather than a bullish one.

However, Wall Street analysts remain enthusiastic. The most accurate forecaster for the US stock market in 2023 recently continued to be bullish, saying that the target price of 5200 points for the S&P 500 index is too low. Tom Lee, the Chief Strategist at Fundstrat, stated that the early-year gains in the US stock market are just an appetizer. Considering the January increase in the S&P 500 index, it is expected to rise by 15% this year and reach 5500 points by the end of the year. Unless there is a significant sell-off in the US stock market during the release of various data this week, historical experience suggests that the full-year increase in the S&P 500 index may reach double digits.