Institutional investors worry about black swan on horizon – CoreData

Institutional investors in the U.S. are bracing for an imminent black swan event — an unpredictable event that has potentially severe consequences — due to fears that recent turmoil in the regional banking sector was only a prelude to a larger financial crisis, according to the latest quarterly "Equities Sentiment Report" by CoreData Research.

Specifically, almost 4 in 10 investors (38%) believe the Federal Reserve's support for lenders has uplifted market confidence only temporarily and that a more widespread financial crisis may be imminent amid a climate of persistent inflation and high interest rates.

In addition, some 59% of surveyed institutional investors think that a tail-risk event has an above-average chance of occurring over the next three months, a CoreData spokesman confirmed in an email.

Roughly half (47%) of respondents think the regional banking crisis from earlier this year may impede economic growth, while some two-thirds (65%) expect interest rates and inflation to remain elevated over the next year.

Moreover, 45% believe that U.S. sovereign debt levels pose a major challenge for the economy in the medium term.

These combined macroeconomic concerns have created a pessimistic short-term outlook for U.S. equities — more than half of respondents (55%) are bearish on U.S. equities over the next three months, while 31% have bullish expectations.

However, despite the downbeat short-term outlook, investors expect large-cap stocks to outperform over that period. Some 44% of respondents expect mega-cap stocks to deliver the highest returns in the equity market over the next three months.

Still, more than half (55%) think the technology sector is overvalued, suggesting tech companies are approaching bubble territory.

Over the longer term, investors are more optimistic — 51% of respondents have a bullish market view over the next 12 months, while 39% are bearish.

Within that optimism, confidence is somewhat slender. Some 40% of the bulls expect U.S. stocks to return only 1% to 6% over the next 12 months.

Overall, investors expect fixed income to generate the strongest risk-adjusted returns over that period, followed by equities and cash.

The sentiment report "shows the short-term outlook for the U.S. 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, in the report, which was released July 7. "While the outlook is sunnier over the next 12 months, expectations of elevated rates and stubborn inflation cast a cloud over investor confidence."

CoreData's findings were based on a survey of 100 U.S. institutional investors that was conducted in June.