Bullish investors are piling into stock and bond funds (2024)

U.S.-based mutual and exchange-traded funds have drawn a net $172 billion of inflows so far this year, a marked turnaround after they collectively bled assets in each of the past two years.

The flows mark a break from the risk aversion that investors had shown for much of the past two years and an embrace of the narrative that a strong U.S. economy will support financial markets. Assets in money-market funds and other cash-like products that investors favored last year have plateaued. Investors are putting their money to work in stocks and bonds instead.

“The economy is in good shape, labor markets are in good shape, and central banks globally look ready to provide support," said Michael Arone, chief investment strategist at State Street Global Advisors. “That’s an attractive backdrop for investing, and it’s the primary reason you’re seeing an increased appetite for everything."

Flows to U.S. stock and bond funds this year are the strongest since 2021 when interest rates were near zero. Globally, the net $468 billion invested in ETFs through April is the highest on record, according to ETFGI data.

The soft-landing trade appears fully back in vogue after several months of hot inflation data rattled investor confidence. The most recent consumer-price data was lower than forecast, and first-quarter earnings results showed booming corporate profits. The S&P 500 is up 11% in 2024, trading just below its record.

Skeptics argue that equity valuations look expensive and the extra yield offered by risky corporate debt is historically low. The S&P 500’s price compared with expected earnings over the next 12 months is currently in the top decile of its historical range, according to Morgan Stanley.

This week, traders will closely watch Friday’s release of the personal-consumption expenditures index, the Federal Reserve’s preferred inflation gauge. Markets appear sanguine about the economic outlook currently, but a hot inflation number could cast doubt on their hopes for rate cuts.

Wall Street is currently pricing in at least one interest-rate cut later this year, though minutes from the Fed’s most recent meeting showed central-bank officials are still concerned about persisting inflation. If the easier monetary policy that investors are anticipating doesn’t materialize, the stock-market rally is likely to sputter, analysts warn.

Investors look anything but defensive. Of the 10 ETFs that have taken in the most money this year, just one is a bond fund. Two track the price of bitcoin.

The leader, the Vanguard S&P 500 ETF, is on pace for a banner year. Investors have added a net $37 billion in less than five months; the annual record for any ETF inflow is $50 billion.

The risk-taking extends into fixed-income markets, where some of the most popular funds over the past month hold riskier corporate bonds and loans that pay higher yields.

“In the last few weeks, we’ve seen significant inflows to loans," Arone added. “That tells me that investors’ risk appetite is elevated, their confidence is higher and they’re willing to take credit risk."

Shane Archuleta, a 29-year-old IT professional in Fort Myers, Fla., is one of the investors rushing into the market. Archuleta said he now tries to invest almost 50% of his after-tax income into retirement and taxable accounts that he manages on Robinhood and E*Trade.

Archuleta has mostly been buying ETFs, including Vanguard’s S&P 500 fund, a Vanguard growth fund, and Invesco’s QQQ, which tracks the Nasdaq-100 index. With a multidecade investment horizon, he says he prefers higher-risk, growth-oriented funds for now.

“My big thing is, ‘don’t bet against the U.S. equity market.’ I have no doubt in the very long run it’s going to go up," Archuleta said.

Fund managers are optimistic, too. Bank of America’s most recent survey of fund managers showed the most bullish sentiment since 2021. The survey found cash levels at multiyear lows and stock allocations at multiyear highs.

Flows tend to lag behind performance. Stocks and bonds got crushed by the Fed’s rate-rising campaign in 2022, so a slower 2023 wasn’t necessarily a surprise, said Aniket Ullal, head of ETF data and analytics at CFRA Research.

What stands out this year is the breadth of funds taking in money. Investors aren’t just putting all their money into the booming technology sector.

“The flows are very broad-based across all categories," Ullal said. “It’s not like a couple of funds or categories are carrying the space."

That strength extends overseas. After trailing U.S. performance for years, international stock benchmarks in Europe and Japan have notched records in 2024. Investors’ money has followed.

“This year will be the record for global ETF inflows unless something unforeseen happens," said Deborah Fuhr, founder of ETFGI. “We’re seeing a lot of tailwinds."

Write to Jack Pitcher at jack.pitcher@wsj.com