Despite a host of macro uncertainties and consensus estimates projecting negative year-over-year (YOY) earnings growth for the S&P 500 Index (SPX) in 2Q and 3Q 2019, the 3 largest ETFs that track the index enjoyed a combined net inflow of $6.2 billion during the week ending July 12, 2019, Bloomberg reports. This indicates that a significant number of investors are still “all-in on equities,” according to Steven DeSanctis, a U.S. equities strategist at Jefferies, as quoted by Bloomberg.

The three ETFs in question are the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO). The respective assets under management (AUM) for these huge funds are, per Morningstar: $282 billion, $183 billion, and $119 billion.

For the year-to-date (YTD) through the close on July 15, 2019, the total return, dividends included, for the S&P 500 was 21.87%. The respective total returns for the ETFs were: SPY, 21.46%, IVV, 21.54%%, and VOO, 21.47%, also per Morningstar.

Significance For Investors

Out of more than 1,600 equity ETFs listed in the U.S., the 3 listed above combined to pull in the most new money from investors, for one of their best weeks in 2019, Bloomberg says. The SPY is offered by State Street Corp. (STT), which sponsors ETFs under the SPDR brand name, and it provides an illustrative example, per a report from Zacks Investment Research summarized below.

The SPY holds 504 stocks, with the largest holding representing 4.23% of its portfolio value, indicating a high level of diversification. Both Alphabet Inc. Class C (GOOG) and Class A (GOOGL) shares are in the fund, for example. The annual expense ratio is a mere 9 basis points (bps) and the fund is highly liquid, with an average daily trading volume of about 73.4 million shares per day. High trading volume keeps the bid-ask spread low, reducing trading costs.

Unlike a mutual fund, since an ETF is traded continuously, its market value is bound to diverge from its net asset value (NAV). Additionally, market fluctuations make it impossible for the portfolio held by an S&P 500 ETF to mirror the index precisely at every point in time, and this leads to tracking errors. Finally, costs, though small, introduce another divergence in performance.

Looking Ahead

Consensus estimates anticipate that S&P 500 earnings for 2Q 2019 will be about 3% below their year-ago levels. However, during the past 5 years, actual S&P 500 earnings have, on average, been 3.7 percentage points better than the estimates, per research by FactSet reported in Barron's. History thus suggests that, once all the reports are in, a modest earnings increase is likely.

Nonetheless, Bloomberg macro strategist Mark Cudmore is now bearish, after being consistently bullish about the market and the economy since 2011. He sees a recession and a tumbling stock market ahead. Cudmore finds most economic forecasts to be unduly optimistic, since they assume that recently-imposed tariffs are temporary and will be rolled back in the near future, as he observed in a Bloomberg podcast.

Morgan Stanley also remains bearish, as they have been for about a year. "Estimates here still look significantly too high to us and we expect companies to temper expectations for a second half recovery," states the current Weekly Warm Up report from their U.S. equity strategy team led by Mike Wilson. Morgan Stanley's Business Conditions Index fell sharply in June and it points to more weakness ahead.