Net inflows from retail investors into US stocks continued to rise last week as the stock market started the new year in buoyant sentiment, but data analysts at Vanda Research said the pace of buying could slow slightly if the upward momentum falters.
Marco Iachini, senior vice president of Vanta Research, attributed January’s surge in retail buying of US stocks to muted buying by exchange-traded funds, which indicates a sign of low confidence in the long-term prospects of financial markets (see chart below). .
SOURCE: VANDATRACK
“We believe January’s market rebound was again driven by a series of short selling by institutional investors and increased demand for shares from retail investors. However, despite the rebound in buying, overall retail flow has yet to recover to previous highs, meaning we’re still in a longer-term downtrend in terms of retail participation,” analysts led by Iachini wrote in Thursday’s Note .
The table below shows that ETFs are currently experiencing the largest flow divergences since 2022. “The bottom three ETFs are the most popular vehicles over the past two years,” analysts said, while the biggest gainers, such as Direxion Daily Semiconductor 3X Bear SOXS, returned -6.78%,
have a defensive bias toward them.
SOURCE: VANDATRACK
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Iachini and his team also expect retail investors in individual stocks to “maintain high levels of participation” as companies, which make up more than half of the S&P 500 SPX, return +1.36% in market value report over the next two weeks. This includes Microsoft Corp. MSFT, +3.13%,
which is due to report its second quarter of fiscal 2023 on Tuesday, followed by Elon Musk’s Tesla Inc. TSLA, +4.03% and The International Business Machines Corporation (IBM) IBM, +0.09% on Wednesday and Intel Corp. INTC, +1.65% on Thursday. According to FactSet, Apple Inc. AAPL, +1.24%, and Google parent Alphabet Inc. GOOGL, +4.72%, will report the following week.
“[Tesla] The stock remains an important contributor to overall retail sentiment/health in our view,” said Iachini. “Retail investors are buying the electric vehicle maker’s stock at one of the widest spreads relative to its history and other securities.”
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With 11% of S&P 500 companies reporting actual fourth-quarter results on Friday, 67% of them reported better than estimate earnings per share (EPS), while 64% of companies reported an upbeat revenue surprise, said John Butters, senior earnings analyst at FactSet. EPS refers to net income divided by the number of shares outstanding and could indicate how much money a company makes for each share.
The composite earnings decline for the S&P 500 for the fourth quarter is 4.6%, Butters said in a note on Friday. If that’s the actual decline for the quarter, it’s the first time the index has reported a year-over-year earnings decline since the third quarter of 2020, which posted a 5.7% plunge.
US stocks traded slightly higher on Friday, with the help of Netflix Inc. NFLX, +7.90% and Alphabet, up 7% and 4.7% respectively, according to company news. The Nasdaq Composite COMP, +2.09%, rallied 2% but is on track to post a weekly loss of 0.2%. The Dow Jones Industrial Average DJIA, +0.57%, rose 163 points, or 0.5%, to 33,207. It fell 3.2% on the week and posted its worst weekly performance since September 2022. The S&P 500 rose 1.3% on Friday and is on track to post a 1.3% weekly loss, according to Dow Jones Market Data.
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