The Federal Reserve’s policy shift is driving a surge in risk-taking across equity and credit markets, with systematic funds and hedge funds ramping up exposure to higher levels.
Barclays strategists noted that falling volatility has sparked an “institutional equity buying spree”, lifting U.S. equity positioning above average. However, they cautioned that September seasonality could act as a headwind.
Investor flows have leaned toward bonds and short-duration credit as markets increasingly price in lower U.S. interest rates. “As expectations for Fed rate cuts gained momentum, credit and short-duration inflows have accelerated, with long-only investors and CTAs showing a preference for bonds over equities,” wrote strategists led by Emmanuel Cau.
The bank highlighted that the record $7.2 trillion in money market funds provides “dry powder” for dip-buying, supported by consistent corporate buyback activity. Nearly half of 2025’s authorized buybacks remain unused, and repurchase activity typically accelerates in September.
Market participation has also started to broaden. Non-Big Tech U.S. sectors and overseas equities are showing stronger performance, helped by Fed cut hopes, easing geopolitical risks, and improving economic data. In Europe, cyclical laggards have rallied on better PMI readings and Ukraine peace talks, narrowing the gap with defensive stocks. Still, positioning in high-beta and short-cycle names remains cautious, suggesting potential for further upside if momentum continues.
Regional flows are also shifting. U.S. investors and CTAs have reduced exposure to Europe, redirecting funds back into American equities, with France emerging as a weak spot due to political risks. European investors remain the main buyers, while German inflows have slowed. Meanwhile, demand for Japanese and Chinese equities remains steady, even as broader emerging markets face outflows.
Barclays warned that the Fed’s support could backfire if the labor market weakens, as rising unemployment would likely slow equity inflows and reduce household allocations. For now, however, strong economic activity and upward earnings revisions support the bank’s overweight call on equities. Analysts emphasized that positioning risk has become more balanced given how much exposure has already risen, but noted that subdued index volatility makes hedges attractive and relatively cheap for managing both upside and downside risks.
