BNY’s Bob Savage uses iFlow data to assess US equities, pointing to falling institutional cash balances alongside elevated valuations and heavy new stock issuance, including large IPOs such as SpaceX. He says iFlow institutional cash holdings have tracked the S&P 500 more closely since Covid, and argues that turning points in cash matter more than the peak-to-trough move when reading prospective equity volatility. Cash holdings are said to be near their 10-year average, while equity risk pricing into Q3 and H2 is framed as being driven by policy expectations rather than inflation itself.
The latest pullback in cash is described as smaller than during Covid or the Russia invasion of Ukraine, even as previous peaks have tended to mark reversals in equity trends, with Liberation Day cited as an exception; cash “buying-the-dip” remains the dominant narrative. Savage links the index’s divergence from holdings to caution around valuation, noting that a higher CAPE has generally coincided with higher cash holdings, partly as defensive positioning ahead of an anticipated mean reversion. On issuance, he says mega-sized IPOs have not typically marked a market top; over the past 50 years, 20% of big IPOs have preceded a market correction, with timing and cash said to coincide with reversals rather than cause them.
Institutional Cash Flows, Valuation Anxiety, and Market Narratives
We are seeing institutional cash holdings begin to decline from their recent peaks, a dynamic that has often preceded reversals in equity trends. Although cash levels are near their 10-year average and the decline is modest, this shift suggests the dominant “buy-the-dip” mentality is being tested. We should monitor this flow closely, as a continued drawdown could signal increasing market conviction or, conversely, a depletion of sideline cash.
The primary concern is the divergence between rising stock indices and these hesitant cash deployments, which points to investor anxiety over high valuations. With the Shiller P/E ratio currently elevated near 32, well above its historical average of 17, this caution is justified. Consequently, we believe purchasing downside protection, like put options on major indices, is prudent while the VIX remains relatively low around 14.
IPO Activity, Liquidity Drains, and Central Bank Policy
The significant number of upcoming IPOs is another factor, but we do not see it as a reliable market top signal. Historically, only 20% of mega-IPOs over the last 50 years have occurred before a major market correction. Therefore, we should view these events more as potential drains on short-term liquidity rather than a definitive reason to turn bearish on the broader market.
Ultimately, market direction through the summer will be dictated by expectations of central bank policy, not just inflation data itself. The May CPI report showed headline inflation easing to 2.9%, yet persistent stickiness in core services keeps Fed policy uncertain. We feel the most profitable derivative strategies in the coming weeks will be those structured around the volatility of key economic data releases and Federal Reserve communications.
