The market shift that reveals skepticism about stocks recent rally

This year has already packed a lot of action into stocks: an aggressively bullish start, a swift correction, and a full recovery from those April losses. But based on the the flows into the U.S. exchange-traded funds, where much of the daily trading action occurs across asset classes, the message coming through most clearly from investors is lingering skepticism about the strength of the U.S. equities market.

May was a great month for stocks, with the S&P 500 Index up over 6%, the Nasdaq Composite up over 9%, and the Dow Jones Industrial Average up roughly 4%. But making up for April’s losses hasn’t removed the underlying fears from the market, as trade uncertainty, from the state of U.S.-China deal talks to the Trump administration’s battle with courts over the legality of tariffs, continue to serve as hurdles for sustained momentum.

At the start of 2025, equity ETFs were trading roughly $3 billion in daily inflows, an “extreme” level of bullishness, according to recent report from Strategas Securities. Since the market recovered all of its April losses, those daily inflows have fallen by more than half, to roughly $1.4 billion, despite the rally.

Where has the money been going?

“Mostly, just hiding out in ultra-short duration,” said Todd Sohn, senior ETF and technical strategist at Strategas, on a recent “ETF Edge” podcast.

The iShares 0-3 Month Treasury Bond ETF (SGOV) and SPDR Bloomberg 1-3 T-Bill ETF (BIL) are both among the top 10 ETFs in investor flows this year, taking in over $25 billion in assets.

“Skepticism, that’s what the equity flows are telling us,” said Sohn of the action since the market low in April. He added this suggests a year that could follow a pattern from bull market history, what he called a “reset year.”

Going back to 1950, years one and two of a bull market generate linear returns that take all equities higher, while third years are more often reset years that tend to reflect a cautious stance on stocks. Or, as Sohn put it: “How much of a good thing can last is a fair question.” 

Since getting back to even, the U.S. market’s 0.6% performance year-to-date through the end of May places it at the bottom of the list for 2025 relative to the performance of regional markets around the world, though it is by no means the worst country market in the world. But at least to date, the ETF flows do suggest a “year three” of a bull market cycle, which tends to more often be a trader year than investor year, with a wide dispersion in returns across equity sectors, according to Sohn.

That said, retail investors with a long-term focus have been buying the U.S. market all year through the ups and downs, with Vanguard Group’s S&P 500 ETF (VOO) on pace for another record year of flows in 2025, at already over $66 billion. But coming off back-to-back years with 20 percent-plus returns for U.S. stocks, the top ETF categories in flows since the April 8 low are crypto, short duration bond, T-bill ETFs, and value (including overseas value stocks such as EAFE ETFs). Meanwhile, tech ETFs, single-stock levered ETFs, and cyclical and small-cap stock ETFs that are most closely linked to aggressive stock bets and conviction about the overall health of domestic economy are near the bottom of the list, with negative flows since the April low.

“Folks want to hang out on the short-end of the [bond yield] curve and are very skeptical on what to do about U.S. equities,” said Sohn. “It’s almost like they are throwing in the towel on cyclicals and small-caps,” he added.

Part of the reason for the lack of interest in cyclicals is related to the yields currently on offer in the bond market, which can make cyclical plays with healthy dividend levels, such as consumer staples, financials, industrials, and materials, less attractive to investors who might otherwise assume the stock market risk for the income component. “That has disappeared with the return of bond yields,” said Sohn. “There’s not really any reason to hold,” he added, as all the income flows that in the past may have gone into income-producing equities go to short duration bond ETFs instead.

One place where investors should keep the faith with U.S. corporations is with their ability to fund bond payments, Joanna Gallegos, BondBloxx ETFs co-founder, said on “ETF Edge.”

After the strong years of 2023 and 2024, corporate credit sheets are “set up to weather the storm,” Gallegos said, and she added that it is possible to stay shorter in corporate credit without exposing oneself to a high level of interest rate risk.

After short duration bonds and T-bills, intermediate duration bonds have seen the most daily ETF flows since the April low among fixed-income categories, and are fifth overall in flows among stock and bond ETF asset classes, according to Strategas.

Unlike equities, most fixed income categories have had positive returns year to date, even with yields near their highest levels in years, according to BondBloxx data.

“Income is back. In fixed income, that’s what is important right now,” she said. “Any investor trying to offset volatility in their equity portfolio, if they haven’t looked at how income is serving their portfolio, that’s what they should do,” Gallegos said.

Gallegos recommends investors consider investment grade credits in the BBB class, between one and five years in terms of maturity (the average maturity is approximately three years), and where yields are near 5%. For investors willing to assume more risk for a bigger payoff in terms of yield, she pointed to the first rung of the high-yield universe, BB, which has an average maturity closer to five years, and where yields are roughly 6%.

But the shorter the duration, the more popular it is right now, for a good reason: “It is hard to argue with 4-4.25% with no volatility,” Sohn said.

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