‘Big Money' turns bullish on stocks. Will that lead the S&P 500 to a ‘melt up'?

DataTrek Research indicates institutional investors are now embracing the recent rally in U.S. stocks, with State Street's Institutional Investor Risk Appetite index showing "Big Money" catching up, potentially leading to a further 'melt up' move higher into quarter end. The S&P 500, currently at 6,000.36, trades at 22.7x consensus 2025 earnings estimates, requiring a belief in further multiple expansion to justify current valuations. However, DataTrek also notes that peaks in the risk-appetite index have often coincided with near-term market tops, suggesting caution despite the bullish sentiment.

Analysis

Institutional investors are exhibiting a notable shift towards bullishness on U.S. equities, as indicated by DataTrek Research and State Street’s Institutional Investor Risk Appetite index, suggesting 'Big Money' is now embracing the recent rally after a de-risking period from March through mid-May 2025. This surge in appetite has fueled speculation of a potential 'melt up' move higher into quarter-end, with the S&P 500 reaching 6,000.36, just 2.3% below its February record high. However, this rally places the S&P 500 at a demanding valuation of 22.7 times consensus 2025 earnings estimates of $264 per share, implying that continued market ascent hinges on further multiple expansion. Nicholas Colas of DataTrek cautions that current risk appetite levels are 'verging on levels consistent with a near term top,' potentially materializing later in June, drawing parallels to previous instances in July 2023, July 2024, and January-February 2025 where similar risk appetite peaks coincided with market pullbacks. Further complicating the outlook, consensus S&P 500 earnings estimates typically decline throughout a year outside of post-recessionary environments, which could make the index appear progressively more 'expensive' even if prices stagnate. Despite these concerns and persistent trade-policy uncertainty, the S&P 500 has achieved a year-to-date gain of approximately 2%.

Key Decisions for Investors

• While the recent surge in institutional bullishness might suggest further near-term upside, investors should be cautious of elevated valuations and the historical tendency for current risk appetite levels to precede S&P 500 tops.
• Monitoring State Street’s Institutional Investor Risk Appetite index for signs of peaking will be crucial, as this indicator has historically signaled potential near-term market corrections.
• Critically assess the sustainability of current equity multiples, particularly as consensus earnings estimates for 2025 may face downward revisions, potentially increasing perceived market expensiveness absent further price gains.