Investor confidence slipped sharply in August as concerns over valuations, tariffs and the broader economic outlook pushed market sentiment back into risk-averse territory, according to the latest S&P Global Investment Manager Index (IMI).

After showing signs of life in July, the IMI’s Risk Appetite Index dropped to -20% in August from +12% a month earlier, marking the lowest level since April. The reversal brings to an end the brief spell of risk tolerance, replacing it with a cautious, defensive stance among institutional investors.

Jingyi Pan, associate director at S&P Global Market Intelligence and author of the report, said the shift was closely tied to the recent wave of tariff announcements: “Investor sentiment has visibly weakened at the start of August digesting the slew of tariff developments since July, including the implementation of higher tariffs for major US trading partners and the announcement of new tariffs on chips towards the tail-end of the survey period.”

Valuations still in focus, but macro fears build

Equity valuations remained the single biggest drag on sentiment for a second consecutive month. Yet the more notable change in August was the surge in concern about both the US and global macroeconomic environments.

Pan noted that tariff-related worries were feeding into broader fears over growth prospects, with implications for inflation and monetary policy. “The potential tariff-related impact on inflation has also invited investors to wipe away their previously held optimism towards central bank policy in supporting US equity performance,” she said.

Central bank policy, which had been viewed positively earlier in the year, is now seen as a neutral factor. This reflects uncertainty over the Fed’s rate-cut trajectory and whether policymakers will be able to counteract the drag from weaker trade and slower growth.

Return expectations slump

The cooling of sentiment was mirrored in near-term US equity return expectations, which fell to their lowest point since April and rank among the weakest levels this year. The combination of rich valuations, policy uncertainty and macro pressures appears to be prompting a reset in investors’ performance outlooks.

Pan said the deterioration in expectations was the most pronounced since the first round of tariff shocks earlier in the year. “The corresponding impact on expectations for near-term market returns shows deepening bearish sentiment to the greatest extent since April when higher-than-expected US tariff announcements were initially made,” she explained.

ESG priorities fade in the current climate

The August survey also captured a marked cooling in the importance of environmental, social and governance (ESG) considerations in investment decisions. While data privacy, executive pay and board composition retained influence, diversity, climate change, pollution and labour standards all saw a significant drop in perceived importance.

This near-universal downgrading of ESG priorities may be a symptom of the current environment, where macro and political risks are dominating decision-making. With trade policy and inflation fears top of mind, softer factors appear to be taking a back seat.

Defensive sectors edge ahead

The shift to risk aversion was reflected in sector preferences. Utilities and consumer staples were the only sectors to see higher net balances in August, suggesting investors were tilting towards defensive holdings that can better weather economic slowdowns.

Despite the caution, the financial sector retained the top position in the rankings, followed closely by communication services and information technology. However, sentiment towards both financials and IT softened compared with July, partly due to the latest tariff updates which included the US administration’s announcement of a 100% tariff on chips.

Consumer discretionary stocks remained firmly out of favour, with bearishness deepening month-on-month. This reflects concerns that household spending could weaken if inflation remains sticky or trade tensions dent confidence.

Regional nuances

Although the report points to an overarching move towards risk aversion, not all regions are responding in the same way. Mohammad Hassan, equities dividend forecasting director at S&P Global Market Intelligence and co-author of the report, said there were signs of resilience among some investor groups.

“Despite the looming challenges posed by tariffs and economic uncertainty, the significant drop in bearish sentiment among North American investors from 47% to just 13% reflects a growing confidence in earnings growth,” Hassan said. “A more durable signal on this nascent shift in investor sentiment will materialise once the last of tariff-related deals are done.”

This divergence underscores how local factors from corporate earnings momentum to policy developments can temper or amplify the broader macro picture.

Implications for market strategy

For now, the data suggests a more guarded approach from investors, with greater emphasis on capital preservation and sector positioning. Defensive allocations are likely to remain in focus until there is clarity on the trajectory of trade negotiations, inflation and interest rates.

The sharp swing from risk tolerance in July to risk aversion in August also highlights how sensitive markets remain to political shocks. Even if earnings growth holds up, valuations and macro conditions are exerting a strong pull on sentiment.

Investors may find opportunities in sectors that combine defensive characteristics with stable earnings potential, a theme reflected in the modest gains in utilities and staples. Meanwhile, the drop in ESG prioritisation may prove temporary if macro conditions stabilise, allowing longer-term structural themes to regain traction.

Looking ahead

The coming months will test whether August’s risk aversion marks the start of a longer defensive phase or simply a pause in the market’s appetite for risk. Much will depend on how quickly tariff disputes are resolved and whether central banks can navigate the fine line between supporting growth and keeping inflation in check.

Until then, the IMI data points to a market in wait-and-see mode, balancing pockets of earnings optimism against a backdrop of political uncertainty, macro pressures and shifting sector dynamics. The result is an investment climate that rewards caution, agility and close attention to the policy environment.