Main Street and Wall Street are moving in opposite directions.
Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months, according to data compiled by Bloomberg and the Investment Company Institute.
The growing optimism contrasts with forecasters from UBS AG to HSBC Holdings Plc, who say the stock market will be stagnant with valuations at a four-year high. While the strategists have a mixed record of being right, history shows the bull market has already lasted longer than average and individuals tend to pile in at the end of the rally.
"If Wall Street, after poring over all known data, comes up with a target and we're already there, and you still see individual investors buying and they're typically the ones that are late to the party, it would seem there is limited upside," Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a July 8 phone interview.
For most of this year, equity investors have seen little volatility and steady gains, giving them confidence to put money back into the market. Individuals deposited about $9.5 billion in June to stock funds and have added cash in eight of the past 10 months, data compiled by ICI and Bloomberg show. That's a reversal from the five years through 2012, when $300 billion was withdrawn.
Professional investors, such as Nick Skiming of Ashburton Ltd., say that individuals investors are attracted to stocks after seeing others getting rich from a big rally, a time when equities are usually overpriced. The bursting of the technology bubble in March 2000 was marked by mutual funds absorbing a record $102 billion in the first quarter.
"As institutional investors, we're always concerned when the retail investor is actually arriving in the market," Skiming, who helps manage $10 billion at Ashburton, said by telephone from Jersey, the Channel Islands. "The retail investor arrives when they can only see blue skies."
For Laszlo Birinyi of Birinyi Associates Inc., stocks have entered what he calls the exuberance phase, the last of four stages usually seen in bull markets. He still sees more gains to come, citing the skepticism on Wall Street as a sign that plenty of investors haven't bought shares yet.
Relatively expensive valuations will also limit future gains, according to Garry Evans, HSBC's global head of equity strategy in Hong Kong. He said in a report last week that the S&P 500 will finish the year at 2,000, a 1.6 percent gain from last week's close. The index trades at 16.6 times projected earnings, near the highest level in four years, data compiled by Bloomberg show.
The bull market, which has almost tripled the S&P 500's value since 2009, is closer to the end than the beginning, said Walter Todd, who oversees about $980 million as chief investment officer at Greenwood Capital Associates LLC. The rally has lasted 64 months, about a year longer than average, according to data since 1962 compiled by Birinyi and Bloomberg.
"To the extent that investors start to put a lot of money into the market, it would certainly be late," Todd said in a July 9 phone interview from Greenwood, South Carolina. "But to say that the end is going to happen in the next few months, I don't agree with that."