Most investors remain bullish but concerned about inflation, skeptical on rate cuts

Buoyancy in the equity market is being driven by mega cap stocks, but investors are nervous about that dynamic despite bullish sentiment overall.

The latest Morgan Stanley Wealth Management Pulse Survey for this quarter reveals that 61% of investors are bullish, one percentage point above the previous quarter, but concern about inflation and skepticism about rate cuts add to the lack of broad-based market gains, despite 59% expecting the market to rise by the end of the quarter.

“It’s understandable to see bullishness remaining steady this quarter as the market pushed higher driven by mega-caps,” said Chris Larkin, managing director, head of Trading and Investing, E*TRADE from Morgan Stanley. “On the flipside, the narrow market could make some traders jittery especially when compounded by a higher for longer rate stance from the Fed. So, it’s easy to see how investors can have mixed emotions about where we stand when it comes to the market and the economy.”

Inflation is the top concern (54%) of investors who took part in the pulse survey, followed by the election (34%), market volatility (22%), and recession (20%). There is also concern that the economy is not strong enough to support rate cuts with the share of those who think it is dropping below half after hovering above it in the last quarter. However, 54% believe the Fed will cut before the year ends.

Asked about specific stock sectors, IT is expected to continue higher as mega caps dominate and chips and AI remaining strong. Energy stocks are also favored thanks to higher prices, while health care continues to attract investors, albeit at a slightly reduced rate of interest from the last quarter.