Is $7 Trillion Money Market Funds Ready to Boost Stocks?

U.S. money market funds have surged to an unprecedented $7 trillion in assets, according to Crane Data. Bulls argue that this massive pool of cash represents sideline money, ready to pour into the stock market and drive it higher. The reasoning? Stocks historically outperform other asset classes, while the returns on money market funds, though currently elevated, often fail to keep up with inflation.

But is this optimism grounded in reality?

Where Is the Money Really Going? Research from Bianco Research suggests a different story. A significant portion of these funds mirrors traditional bank deposits, serving households' everyday financial needs rather than being earmarked for investment. Since the Federal Reserve began its aggressive rate hikes, U.S. banks have lost $1.29 trillion in deposits. Simultaneously, money market funds have swelled by $1.79 trillion—a nearly dollar-for-dollar shift fueled by rising interest rates, which have provided these funds with yields near 5% for the past two years.

Money market funds attract savers with competitive, market-driven rates and security akin to bank deposits. Meanwhile, banks have been slow to raise deposit interest rates, prompting households to transfer their savings. Additionally, risk-averse investors often treat money market funds as a bond alternative, prioritizing stability and content with current yields, which remain historically high.

Investor Sentiment and the Myth of Sideline Cash

If large sums of cash were truly poised to enter the stock market, bullish sentiment would likely be subdued, reflecting caution about future gains. Yet, retail investor sentiment tells a different story. A recent survey shows that 56.4% of respondents expect the stock market to rise—an all-time high.

Moreover, analysis by Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC, reveals a counterintuitive trend. While household cash levels have risen 38%, their equity holdings have soared 50%. This means that cash represents a smaller proportion of household portfolios today, leaving little dry powder for additional stock purchases.

Conclusion

The narrative of $7 trillion in money market funds as untapped fuel for a stock market rally doesn't hold up under scrutiny. Much of this capital is allocated for essential purposes, positioned as a low-risk haven, or intended as a bond substitute. Meanwhile, elevated investor optimism and high existing equity exposure suggest that much of the available capital is already in play. Investors banking on a wave of sideline cash may be overestimating its potential to drive further market gains.