US investors brace for financial crisis as black swan fears take hold

US institutional investors are readying for an imminent black swan event amid fears
recent turmoil in the banking sector is a prelude to a bigger financial crisis, new research shows.

CoreData’s Equities Sentiment Report, which surveyed 100 US institutional investors in June, found six in 10 (59%) think a tail risk event is more likely than average over the next 3 months.

A major danger flashing on investor risk radars is a financial crisis following the turmoil engulfing US regional lenders earlier in 2023. Four in 10 (38%) investors think the Fed’s support for lenders has shored up market confidence only temporarily and that a bigger financial crisis looms on the horizon.

Fears about the repercussions of recent bank failures are feeding into a gloomy outlook for the economy amid expectations of persistent inflation and high rates. About half (47%) of respondents think the impact of the regional banking crisis on lending conditions will put a brake on economic growth. And two thirds (65%) expect interest rates and inflation to remain elevated for the next year. In addition, 45% think US sovereign debt levels pose a major challenge for the economy in the medium term.

These macroeconomic headwinds are conspiring to shape the short-term outlook for US equities,
according to the quarterly Equities Sentiment Report. Investors point to inflation expectations (54%), economic projections (53%) and interest rate expectations (49%) as the dominant drivers of the 3-month US equity outlook. And this is translating into a downbeat market sentiment.

Over half of respondents are bearish on US equities over the next 3 months (55% vs. 31% bullish).

Despite the negative short-term outlook, investors think bigger stocks will outperform. More than two in five (44%) expect mega caps to deliver the highest returns over the next 3 months. However, 55% think the technology sector is overvalued, suggesting some think it’s in bubble territory.

The study shows the outlook over the next 12 months is more positive, with a majority of investors bullish on US equities (51% vs. 39% bearish). But confidence remains thin — the largest portion of bulls (40%) expect US equities to return just 1% to 6%. Underscoring this cautious approach, investors think fixed income will generate the strongest risk-adjusted returns over the next year. While US equities rank second, cash completes the top three asset classes for returns. This demonstrates investors are adopting a defensive mindset and are attracted to the higher returns on cash after successive rate rises.

“Our Equities Sentiment Report shows the short-term outlook for the US market is bearish as macro headwinds and fears over the impact of the recent bank crisis send jittery investors into risk-off mode,” said Andrew Inwood, founder and principal of CoreData. “While the outlook is sunnier over the next 12 months, expectations of elevated rates and stubborn inflation cast a cloud over investor confidence.”