In early July, we observed that despite equities reaching record highs and a narrative of heightened risk appetite, overall positioning was neutral, with only isolated pockets of exuberance. Fast forward to today: the S&P 500 has climbed further, equity positioning has increased, but remains only moderately overweight. Momentum chasing is evident, though confined to specific areas.

- Equity Positioning: Equity positioning has reached a one-month high, moderately overweight at 0.43 standard deviations (69th percentile). It is still far from extremes that might signal heightened reversal risks. Notably, discretionary investors raised exposure slightly this week (-0.03sd, 44th percentile), but remain neutral, leaving room to align with robust macro and earnings growth. Systematic strategy positioning, however, is clearly elevated at 1.00sd (92nd percentile).

- Momentum Chasing: Signs of momentum-driven activity are visible in certain areas. For instance, stocks with the highest net call volumes over the previous week rallied sharply after two months of underperformance. This suggests rising risk appetite and momentum-driven buying. Similarly, a short-term momentum basket of stocks surged, and inflows into momentum-targeting funds hit their highest levels this year. Investor sentiment has also rebounded sharply, moving to the middle of its range after hovering near extreme lows last week. However, broader indicators of risk appetite, such as inflows into leveraged and single-stock ETFs, remain subdued.

- Equity Inflows: Equity funds saw near-record inflows this week ($68bn), with $58bn directed toward the US. While this is impressive, it aligns with typical September seasonality, which often sees large inflows. Historically, this pattern suggests a potential lull in flows in the coming weeks, followed by a ramp-up in the last two months of the year that continues into the first quarter of the next year.

- Post-FOMC Rally: The post-FOMC rally aligns with recent trends, with nine of the last 12 FOMC meetings resulting in the S&P 500 closing higher the following day by a median of 0.5%. This reflects the buildup and subsequent dissipation of equity volatility premiums. While attention remains on the magnitude of future rate cuts, equities are primarily driven by rate volatility rather than rate levels. Rate volatility has continued its downward trend, reaching levels last seen in late 2021 and returning to its pre-tightening cycle range.

In summary, while equity positioning and momentum chasing are gradually increasing, broader risk appetite indicators remain cautious. The seasonal flow dynamics and rate volatility trends suggest a measured path forward for equities.