Recession fears have crushed risk appetite for stocks in December, but easing inflation brightens the outlook on consumer sectors, S&P says

• Risk appetite for US stocks among institutional investors plunged in December, S&P Global Market Intelligence said Tuesday.
• The firm's Risk Appetite Index veered to negative 13% from neutral in November.

Risk appetite for US stocks among institutional investors veered sharply lower in December but consumer-linked shares appeared to gain favor as inflation cooled from multi-year highs, S&P Global said Tuesday.

"With almost one-in-eight investors anticipating a deep recession, and a further 70% expecting a mild recession, the macro environment remains a key concern for the markets," Chris Williamson, executive director at S&P Global Market Intelligence, said in a statement about the monthly report he wrote.

The firm's Risk Appetite Index flipped to negative 13%, pulling back from neutral in November and marking the lowest level since September. The result came from a survey of around 300 institutional investors operating funds with roughly $3.5 million in assets under management.

The global macro environment, central bank policy, and the US macro economy were seen as the biggest drags on the market, said Williamson.

"While in all three cases the perceived drag has moderated slightly compared to November, investors still see the economic environment and prospect of further rate hikes to be major headwinds for equities," he said.

The Federal Reserve, in its fight to bring down inflation from four-decade highs, looked ready this week to issue its seventh interest rate increase of 2022. The Fed in jacking up borrowing costs is aiming to slow economic activity, which, in turn, ramps up worries about the US sliding into a recession in 2023.

For its part, Bank of America projected the economy could enter a contractionary period by March. The S&P Global survey found 82% of respondents see a recession as the most likely scenario to develop in the coming months. The rate was 12% for deep-recession expectations, up from 4% in July.

Meanwhile, the Expected Returns Index moved further into negative territory. S&P Global MI said equity fundamentals and shareholder returns looked set to provide less support to stocks than previously anticipated, increasing concerns over valuations.

It said one "bright spot" in the December survey was sentiment has turned increasingly positive for the consumer staples sector and less bearish towards consumer discretionary stocks, suggesting some benefits to households with inflation cooling in recent months. The November inflation report released Tuesday showed headline inflation eased by more than expected to 7.1%.

Healthcare logged the highest degree of bullish sentiment among sectors, displacing energy from the top spot. But real estate remained the least preferred sector, stemming in part from the impact of higher interest rates.

The S&P 500 plunged into a bear market in 2022 as the Fed kicked up interest rates but the index has narrowed its potential loss for the year to about 16%.