In a surprising turn of events, investors who may have missed out on this year’s unexpected stock market rally appear to be cautiously re-entering the US stock market. Global fund managers have significantly increased their exposure to US stocks this month, marking a record surge in investment, according to Bank of America survey data dating back to 1999. September also marked the first month since last August that global fund managers have shown an above-average allocation to US equities.

This shift in sentiment suggests that investors who had been on the sidelines while equities steadily climbed higher throughout the year are now beginning to deploy their cash into the stock market, as some experts point out.

The benchmark S&P 500 index, defying earlier expectations of a decline as the Federal Reserve continued to raise interest rates to combat inflation, has surged by approximately 15% this year. This remarkable performance has led some investors to experience a classic case of fear-of-missing-out (FOMO), notes Saira Malik, Chief Investment Officer at Nuveen. The late summer slowdown in the stock market, especially among mega-cap technology stocks that had been leading the surge, has created an enticing opportunity for investors to buy into the dip.

However, it’s essential to note that the S&P 500 has dipped by 2.4% in September, following a 1.8% loss in August—marking its second losing month this year. Notable tech giants such as Nvidia, Apple, and Microsoft have also faced declines of 14%, 7%, and 2%, respectively, this month.

On the macroeconomic front, there is a growing consensus on Wall Street that the Federal Reserve is nearing the end of its cycle of interest rate hikes. In its latest announcement, the central bank opted to keep rates unchanged and indicated the possibility of one more rate hike later in the year. The market appears divided on whether the central bank will proceed with a rate hike in December or pause, according to the CME FedWatch Tool.

This anticipation of the Fed’s nearing rate hike conclusion has brightened the outlook for a possible soft landing scenario. In this scenario, inflation gradually eases down to the central bank’s 2% target without causing a severe economic downturn. Factors such as resilient spending and a robust job market have played pivotal roles in supporting the economy throughout the Fed’s arduous rate hikes.

Saira Malik remarks, “[Investors] were holding their cash saying, ‘okay, when the recession comes, I’ll put my money back into the market.’ Instead, we have not seen a recession.”

Nonetheless, bond yields recently reached their highest level since 2007, as investors anticipate that the central bank will maintain higher rates for an extended period. This trend, combined with surging oil prices surpassing $90 a barrel for the first time in nearly a year, could exert continued pressure on stocks. Investors seeking higher returns may favor risk-averse investments, such as government-backed bonds, over stocks.

The persistence of higher interest rates also poses a challenge to technology stocks, which have been at the forefront of this year’s market surge.

Alex McGrath, Chief Investment Officer at NorthEnd Private Wealth, warns, “Heading into the fourth quarter with rate expectations remaining elevated, we are more than likely in for a choppy end of the year.”