Trader Sentiment Soars to Two-Year High as Inflation Worries Subside

Traders express strongest bullish sentiment in two years as inflation concerns ebb

Retail traders are showing the highest level of optimism in two years, according to a Charles Schwab (NYSE:SCHW) survey, with 56% reporting a bullish outlook for markets over the next three months, up from 46% in Q2. The increased bullishness comes as inflation concerns eased in Q3 vs. Q2, while expectations for rate reductions by the Federal Reserve rose. Some 33% of survey respondents expect rate cuts of 50 basis points or more in the remainder of the year, up from 25% of those surveyed predicting such cuts last quarter. "While we have seen increased market volatility since fielding our Q3 survey, we're seeing some longer-term positivity among traders," said James Kostulias, head of Trading Services at Charles Schwab. By sector, traders were most bullish on information technology (NYSEARCA:XLK), followed by energy (NYSEARCA:XLE), health care (NYSEARCA:XLV), and utilities (NYSEARCA:XLU). They were least bullish on real estate (NYSEARCA:XLRE) and consumer discretionary (NYSEARCA:XLY). Most traders continued to favor artificial intelligence-linked stocks, the Charles Schwab Trader Sentiment Survey showed, with bullishness toward the segment increasing six points Q/Q to 62%. They point to information technology as the sector that will be most impacted by the rise of AI, followed by health care. When surveyed about asset classes and investment styles, traders expressed a growing positive sentiment toward growth stocks, mega-cap tech, domestic equities, and the broader equity market. However, there was a noticeable decline in bullishness toward spot bitcoin (BTC-USD) exchange-traded funds and spot ether (ETH-USD) ETFs.

AI, Energy Stocks Gain Favor as Active Trader Confidence Jumps to 2-Year High

The political landscape, a possible market correction, and inflation were primary concerns for traders. People who trade actively are increasingly optimistic about the stock market this quarter, with that sentiment rising markedly since late last year. According to a Schwab quarterly client survey released Wednesday, market confidence is at its highest level in two years. Fifty-nine percent of Schwab clients who trade actively in the financial markets said they feel now is a good time to invest, up from 41% in the fourth quarter of 2023. This quarter, 60% said they were better off financially than they were a year ago, compared with 33% who reported feeling that way in late 2023. This survey was conducted between July 9-19, 2024. "Coming into the third quarter, traders reported higher levels of optimism about the markets and economy -- and continued confidence in their own decision-making," James Kostulias, Charles Schwab's head of trading services, said. As for which stocks the traders were most excited about, artificial intelligence (AI) topped the list. Traders reported having a bullish sentiment over the next three months for AI (62%), domestic stocks (59%), growth stocks (58%), and mega-capitalization tech stocks (57%). The majority of traders (57%) were bullish about equities in general. Yet the traders were feeling less enthusiastic about alternative investments like cryptocurrency. Only 22% and 21% had a bullish feeling about the new spot bitcoin and spot ether exchange-traded funds (ETFs), respectively. When looking more broadly at which sectors traders had favorable views of, many were bullish on information technology (61%), energy (57%), and health care (49%). In contrast, fewer traders were enthused about the consumer discretionary (23%) and real estate (21%) sectors. Although inflation was the top concern for traders last quarter, it fell to third place as more Schwab client traders anticipated relief in the form of rate cuts soon: 33% of respondents expect rate cuts of 50 basis points or more through the end of the year. Recently, Federal Reserve Chair Jerome Powell indicated that there would be a rate cut at the September Federal Open Market Committee (FOMC) meeting, but it's uncertain how large the cut will be. In addition to economic worries, the most traders expressed concern about the political climate due to the impending presidential election. While 20% cited the political landscape in Washington, D.C., as their primary concern, 94% thought the November election would have at least some impact on the markets. The second top concern was a market correction. Some traders are preparing their portfolios ahead of the election -- 44% said they were reducing risk in their portfolio and 25% are engaging in options hedging. "A sizable portion are taking steps to manage risk, and even more are leaving the election out of their trading plans -- a good indication that they are paying close attention but not being overly reactive," Kostulias said.