Markets Go All-In on Risky Stocks

Investors are eagerly diving into the riskiest parts of the stock market, showing little concern for looming economic and geopolitical threats as the S&P 500 inches closer to a record high.

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Despite warnings about upcoming headwinds—such as the scheduled end of President Donald Trump’s tariff pause in two weeks, deteriorating economic indicators, weakening consumer confidence, and ongoing global conflicts—many traders are favoring high-risk, high-reward stocks.

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While Wall Street strategists continue to recommend safer bets like companies with strong balance sheets that can weather volatility, retail investors appear to be ignoring that advice.

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One clear sign of this shift toward risk is the performance of the Invesco S&P 500 High Beta ETF, which focuses on stocks known for large price swings. It's currently set for its best quarter relative to the Invesco S&P 500 Low Volatility ETF since 2020. Similarly, a Goldman Sachs index tracking companies with weak financial foundations is having its best month versus the broader S&P 500 since September.

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Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, said this surge in risky investments signals the beginning of a familiar pattern: the "fear of missing out" (FOMO) that typically marks the late stages of a long-term bull market.

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“What’s surprising is how fast investors jumped back into speculative names, especially considering the extreme pessimism just two months ago and the ongoing uncertainty in the economy and policy landscape,” Emanuel explained.

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Retail investors are playing a central role in this trend, continuing to pour money into momentum-driven stocks, particularly those in the tech sector. Even back in early April, when the S&P 500 came close to falling into bear market territory amid a tariff-driven selloff, individual investors kept buying while institutional players were heading for the exits.

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Paul Nolte, a market strategist at Murphy & Sylvest Wealth Management, noted that the behavior of buying dips has become ingrained since the pandemic. “If you look at every quick downturn since Covid, investors have consistently treated those moments as buying opportunities, especially in higher-beta stocks,” Nolte said. This approach has been reinforced over time, giving investors confidence that markets will rebound quickly from turbulence.

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Large-cap technology firms continue to be the main engine behind the market’s strength. Although there was a brief slowdown in tech stock performance earlier this year—when the emergence of China-based AI firm DeepSeek created uncertainty about who would dominate artificial intelligence—the major U.S. tech companies have regained their momentum. Since the tariff concerns began to subside, these companies have once again taken the lead in pushing the S&P 500 higher.

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Keith Lerner, co-chief investment officer at Truist Advisory Services, said that once tariff fears calmed down, the market returned to its primary theme: artificial intelligence. “Investors rushed back to the dominant narrative, which is still centered on AI,” Lerner said.

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This renewed focus on technology stocks has come at the expense of small-cap equities. Indexes like the Russell 2000 and the S&P 600, which consists solely of profitable smaller firms, have both underperformed compared to the S&P 500 this year.

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Analysts attribute this underperformance in part to the limited presence of tech in these small-cap indexes. While information technology and communication services together make up nearly 43% of the S&P 500, their combined weight is only around 13% in the Russell 2000 and roughly 16% in the S&P 600.

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Moreover, the robust gains in tech have played a significant role in supporting overall earnings growth for the broader market. Analysts expect S&P 500 profits to grow about 8% this year, driven largely by technology companies, which are projected to deliver earnings growth close to 21%. By contrast, profit expectations in most other sectors are relatively modest.

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“In times of earnings uncertainty, investors naturally shift toward sectors that are backed by powerful, long-term trends,” said Lerner of Truist. And at the moment, that long-term trend is artificial intelligence, giving tech stocks a clear edge.

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In summary, even as warning signs persist—from policy risks to global instability and softening economic data—investors are doubling down on volatility. They’re gravitating toward momentum trades, betting that big tech and speculative names will continue to lead the market upward. Whether that optimism will hold in the face of future disruptions remains to be seen, but for now, the appetite for risk is back in full force.

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