BNY’s Bob Savage, using iFlow data, reports that institutional cash balances in U.S. equities are declining, with current levels sitting near their 10-year average [1]. This trend follows a pattern observed since the Covid period, where cash holdings have tracked the S&P 500 more closely. Savage notes that while the current pullback in cash holdings is modest compared to the Covid crisis or the Russia-Ukraine invasion, peaks in cash levels have historically served as indicators for reversals in equity trends, with the exception of Liberation Day [1].
The analysis points out that investors appear cautious due to elevated valuations, which are driving increased stock issuance, including record IPO activity such as the recent SpaceX offering [1]. Higher CAPE ratios have generally been associated with higher cash holdings, reflecting defensive positioning ahead of potential mean reversion. Savage emphasizes that while mega-sized IPOs have not typically signaled a market top, 20% of large IPOs in the past 50 years have preceded a market correction. However, the timing of IPOs and cash movements tend to coincide with, but do not cause, market reversals [1].
Looking ahead, Savage identifies policy expectations—not inflation itself—as the primary driver of equity risk pricing into the third quarter and the second half of the year [1]. This suggests that market participants are more focused on potential policy shifts than on inflationary pressures when assessing equity risk.
CONCLUSION
BNY’s analysis indicates that while institutional cash levels are declining and valuations remain high, these factors alone are not definitive signals of an imminent market correction. Market participants are closely watching policy expectations as the key driver for equity risk in the coming months.