Small-cap equity inflows continue, private clients turn sellers: BofA

U.S. equity flows remained positive for a second consecutive week, driven by sustained net buying from institutional clients and hedge funds. Notably, private clients, who have been the sole cumulative net buyers year-to-date, turned cautious, registering net sales for the second time in four weeks and seeing their four-week average flows turn negative for the first time this year. This period saw continued rotation into small caps and growth strategies, with technology, communication services, and consumer staples leading sector inflows, while corporate buybacks also accelerated.

Analysis

U.S. equity markets recorded a second consecutive week of net inflows, though underlying client behavior reveals a significant divergence. The primary driver of inflows was institutional clients, who extended their net buying streak to six weeks—the longest since late 2022—and were joined by hedge funds. In a notable reversal, private clients, who had been the only cumulative net buyers year-to-date, turned net sellers and saw their rolling four-week average flow turn negative for the first time this year, signaling a cautious turn from retail. A clear rotation into small-cap equities is underway, with both single stocks and ETFs in the segment seeing robust inflows. Sector preferences show a clear tilt towards growth and technology, with Technology, Communication Services, and Consumer Staples leading inflows. Conversely, Utilities experienced near-record withdrawals for a second straight week, with Industrials and Financials also seeing significant outflows. Further underscoring this trend, growth-focused ETFs attracted more capital than value strategies for the first time in six weeks. This rotation is occurring alongside an acceleration in corporate buyback activity, which is running above typical seasonal levels for the first time in ten weeks, providing a technical support layer for the market.

Key Decisions for Investors

• Monitor the shift in private client sentiment closely, as this group's recent turn to net selling removes a key source of market support that was present year-to-date.
• Consider overweighting small-cap and growth-oriented technology and communication services stocks, given the strong, institutionally-led inflows into these segments.
• Exercise caution or consider underweighting positions in the Utilities, Industrials, and Financials sectors, which are experiencing significant and persistent outflows.
• Recognize that accelerated corporate buybacks are providing a technical tailwind that may partially offset a potential increase in market volatility from wavering retail investor support.