Risk appetite among US equity investors has slumped in February amid a re-evaluation of policy impact, according to the latest S&P Global’s Investment Manager Index  (IMI) survey. The IMI’s headline Risk Appetite Index fell from +15% in January to -27% in February.

The sharp decline signals a return to risk aversion on balance, contrasting with the revival of risk appetite seen in the prior three months following the US presidential election. February’s reading takes risk appetite further from December’s 44-month high, down close to the level plumbed last September. In fact, since data were first collected in October 2020, only four months have recorded higher risk aversion than that currently being reported.

February has also seen investors’ expectations of US equity returns over the coming month turn sharply negative, falling further from the near-survey high recorded back in November to now sit at one of the most pessimistic levels in over four years of survey history.

Political and macro worries intensify

The single biggest change to investors’ views on what’s driving the markets is a perceived deterioration in the political environment, which is now reported as the biggest drag on US equities barring only concerns over high valuations – albeit with concerns over the latter now at the highest since the survey began in October 2020.

However, February also saw a significant reassessment of the US macroeconomic environment, which investors now perceive to be only a negligible positive driver of equity returns. In contrast, the prior two months had witnessed investors consider the US economy the most critical driver of equities. February is likewise seeing investors report the global macro environment as an increasing drag on US equities.

Concerns are focused on tariffs and the scope for escalatory trade protectionism to weaken economic growth both within the US and globally, with concerns also intensifying in relation to second-round effects, such as higher US inflation and an accompanying hawkishness from the Fed. Whereas late 2024 saw investors view central bank policy as a key driver of equity returns, Fed policy has now been viewed as a drag for two successive months.

Similarly, despite pledged tax cuts, fiscal policy is now perceived as a drag on equities in February, exerting its biggest pull for over a year.

That leaves shareholder returns and equity fundamentals as the only two significantly perceived market drivers in February. Moreover, in both cases, these are viewed as exerting a reduced influence compared with January, especially in the case of fundamentals, which has, in turn, been reflected in lower earnings expectations. When asked about the key risks to dividend growth, investors remained cautious, citing the uncertainty at play given the increased risks for prolonged tariff implementation.

Changing sector preferences

Looking at sector preferences, investors continue to favour financials the most, in part reflecting the shift to lesser regulation, now followed by healthcare. Previously highly ranked tech and communication services sectors have meanwhile lost favour, with the former falling into bearish territory for the first time in five months.

The downturn in sentiment recorded toward tech has been greater than for any other sector, though notably steep falls in investor appetite are also recorded toward energy and consumer discretionary, as well as industrials and utilities. However, real estate remains the least-favoured sector, followed by basic materials.

Chris Williamson, Executive Director at S&P Global Market Intelligence and author of the report, said: “The mood has soured among US equity investors to one of the most risk-averse we’ve seen over the past five years. Having been initially buoyed by President Trump's return, investors are now taking a darker view of market prospects, including the re-evaluation of likely near-term market gains and earnings potential.

“Talk of tariffs and rising geopolitical tensions have clearly exerted a toll on investor sentiment, with the political environment, fiscal policy, and central bank policy all now seen as drags on the market, while positive views on the US economy have faltered.”

Mohammad Hassan, Equities Dividend Forecasting Director at S&P Global Market Intelligence and co-author of the report, added: “After the initial post-election buoyancy, investors are now pragmatically weighing the risks to earnings and dividend growth emanating from the new administration. Potential changes to trade policies, inflation, and Fed policy shifts are at the forefront. Rising input costs and a stronger dollar could squeeze earnings, while M&A may take priority over buybacks as firms adapt to a new political and economic landscape.”