Markets are back.

The S&P 500 index is up 15% since the beginning of the year.

Since its October 2022 lows, it’s up over 23%.

That’s a technical bull market.

And the latest data suggests that investors are buying shares at a rate that market observers haven’t seen in months.

What does it mean?

Money Is Flowing into Equity ETFs

ETFs (or exchange-traded funds) have been seeing the largest capital inflows in months.

A BlackRock study says that in the United States, inflows into US equity ETFs have grown to $22.1 billion in May.

This tells us that investors are switching from a “risk-off” mode to a “risk-on” one.

In a risk-off mode, investors prefer safer assets such as the US dollar, Swiss franc, US Treasurys, and other “safe haven” investments.

In a risk-on mode, they prefer stocks, commodities, and options.

And right now, the tide is turning.

After a long period of panic and volatility, investors are willing to put their capital at risk in search of potentially higher returns.

One explanation for this is interest rates. They are close to peaking, but it’s clear that the safest assets aren’t going to generate attractive returns. It’s true that savings accounts pay more now than they did before the Federal Reserve and other central banks started hiking interest rates. But as it becomes clear that interest rates could settle in the 5% range, investors who want their money to work harder need to look elsewhere.

Another reason is that the market has processed the macroeconomic changes of the past year and a half, including rising interest rates, the global supply chain evolution, the war in Ukraine, and the consequences it had on energy markets.

In other words, markets are more confident these days.

So, what are investors looking at?

Tech and Gold Dominate Inflows

Gold has been a star performer this year. It’s up 7% since the beginning of 2023, and its price crossed the much-discussed level of $2,000 per ounce back in April.

Right now, it’s trading below that level, but the market believes that gold has more room to run.

One of the reasons is the potential economic slowdown in the United States. While it’s not supportive for all equities, gold stocks could benefit from this expectation.

Another one is technology.

Artificial intelligence has been a key investment trend this year. It attracted attention—and capital.

This trend isn’t over, as the BlackRock data shows.

Investors remain excited about it, and they are willing to bet their own capital on some of the companies involved in it.

As a result, AI has officially become a multi-trillion trend.

Investors’ interest in artificial intelligence pushed the value of technology stocks included in the Nasdaq index up by $4 trillion, according to The Guardian.

Both hardware and software makers are winning in the AI rally. Companies like Microsoft, which invested $13 billion into OpenAI, the maker of ChatGPT, and NVIDIA, the maker of chips that train and run AI models, are on investors’ radars.

Shares of Microsoft are up 17% as of writing, while NVIDIA’s are up 84% year-to-date.

Smaller companies that develop AI applications are up even more. C3 AI is up 111% since the beginning of 2023.

In our view, smaller companies could, albeit at a higher risk, provide the most upside potential in this rally.

Thank you for your loyal readership,

The Financial Star team