The trillions of dollars that have flooded into passive funds in recent years have inflated valuations, radically reshaping the US stock market and insulating it from the threat of a sustained bear market, research has claimed.
Vincent Deluard, global macro strategist at brokerage StoneX, argued that the unprecedented flows have led to structurally higher stock valuations disconnected from company fundamentals, benefited large and growth stocks at the expense of value and small-cap shares and resulted in fewer, and shorter lived, market corrections.
“A preponderance of evidence suggests that the rise of passive has played a major role in the stock market bubble of the past decade,” Deluard said. “If the rise of passive is the main cause for this bull market, a sustained bear market can only occur if the passive sector shrinks.”