The individual investor is making a comeback in the world of equity mutual funds, where the pursuit of growth potential is in "full swing."

According to a recent note by Barclays, this resurgence is expected to contribute to an ongoing rally in U.S. stocks, despite prevailing macroeconomic risks. In particular, individual investors are showing a growing interest in equity mutual funds, which in turn are eager to increase their exposure to U.S. stocks. Barclays' data, derived from a sample of over 2,500 U.S. equity mutual funds with a total asset value of $10.5 trillion, suggests this trend, with the S&P 500 serving as a benchmark.

While these mutual funds are still retaining some cash for its attractive short-term yields, they have been increasing their long equity futures positions, nearly reaching levels comparable to 2021. This upward shift signifies a sense of urgency among funds to enhance their exposure to the benchmark index. Interestingly, the funds appear more willing to invest in tech companies, despite their extended valuations, rather than the rest of the S&P.

Tuesday witnessed yet another morning of gains for both the Dow Jones Industrial Average and the S&P 500. The former is poised for its seventh consecutive day of growth, while the latter continues to rise above its 15-month high. Despite a slightly lower opening following a moderate retail-sales report for June, all three major indexes remain resilient. As of now, the Dow industrials, S&P 500, and Nasdaq Composite have experienced year-to-date gains of 5.4%, 18.2%, and 36%, respectively. This year's performance marks a significant recovery from the dismal outcomes faced in 2022, which proved to be the worst year for these indexes since 2008.

Optimistic AI-Driven Rally in Equities

The recent rally in equities is being primarily driven by AI-driven optimism and buttressed by the view that the U.S. economy is able to withstand higher interest rates than previously thought. What makes the rally particularly interesting, though, is that it comes at a time when the rest of the world may be in trouble.

Concerns Over China and Eurozone Crisis

On Monday, China reported lower-than-expected second-quarter growth on a year-over-year basis — triggering questions over whether the Asian country and the eurozone, which fell into a technical recession earlier this year, may drag the U.S. down with them.

Retail Investors' Bullish Sentiment

Despite the ongoing risks, "retail investors' sentiment has turned very bullish amid enthusiasm for tech, given fading headwinds from rates," said the Barclays team. "That said, retail demand for equities is still relatively muted compared to bonds or money markets, leaving room for equity inflows to continue into year-end, especially if the 2Q23 earnings season proves better than expected."

Increased Interest in Single-Stock Options

In addition to equity mutual funds, individual investors have also been buying single-stock options, particularly calls or contracts to purchase a certain stock at a particular price up until a defined expiration date. This is among the factors which point to a "grab for upside," according to Barclays.

Cautious Approach by Global Macro Hedge Funds

Meanwhile, global macro hedge funds have turned cautious over the last month, cutting their long-equities exposures they had accumulated earlier in the year. With investors now geared up for a busy week of second-quarter corporate results, hedge funds have "room to add if the upcoming earnings season gives credence to a soft landing scenario."

Positive Performance in U.S. Stocks and Treasury Yields

Heading into New York afternoon trading on Tuesday, U.S. stocks were mostly higher, with Dow industrials up by more than 300 points, or 1%. Meanwhile, Treasury yields were mixed, while the ICE U.S. Dollar Index reflected investors' view on the U.S. outlook versus the rest of the world, waffled between gains and losses before rising by almost 0.2%.

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