(Bloomberg) — Assume the scorching U.S. stock rally is extreme in an economic system frozen by shutdowns? From one perspective, it’s simply getting began.Large piles of cash sloshing across the monetary system means there’s substantial ammunition but to push danger belongings greater. JPMorgan Chase & Co., in the meantime, sees potential for billions to stream into equities on the expense of bonds to rebalance portfolios. Cash-market funds have lured $1.2 trillion this yr, whereas fund managers with $591 billion general are holding cash at ranges not often seen in historical past, in line with Bank of America Corp.All that reveals how a lot firepower traders must assist the market at a time when stock costs look unhinged from fundamentals like company earnings, and commerce frictions between China and the U.S. return to the forefront.“Investors are still underweight equities and signs of overextension are confined to momentum traders,” JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a observe. “There is still plenty of room for investors to raise their equity allocations.”JPMorgan says the fairness allocation of non-bank traders — a bunch that features households, pensions, endowments and sovereign wealth funds — will in all probability rise to 49% within the coming years, given the backdrop of low rates of interest and excessive liquidity. At present, the proportion is 40%.Simply ask John Roe, the pinnacle of multi-asset funds at Authorized & Basic Funding Administration. He began shopping for extra shares not too long ago after discovering few alternatives in credit score. The investor sees a self-reinforcing rally as greater costs draw extra shopping for and positioning, however he’s having to look previous his considerations that the pandemic will inflicting lasting harm to the economic system.“Equities have reached a range where we worry about self-reinforcing momentum,” Roe stated. “It’s very tough when we are fundamentally negative and think the scarring risks are under-appreciated.”One other signal of cautious sentiment: traders are deeply quick the market, so there’s potential for stocks to rally once they cowl their positions.Speculators have constructed up the biggest web quick place on S&P 500 futures since late 2015, in line with regulatory knowledge. Brief curiosity on this planet’s largest exchange-traded fund — which tracks the U.S. stock benchmark — can be nonetheless hovering near its peak in March, in line with Markit knowledge.Amongst retail traders and the like, danger urge for food may be returning steadily.U.S. stocks and credit score funds recorded stronger inflows within the week by means of Wednesday, in line with EPFR International knowledge cited by Bank of America. On the similar time, flows into cash funds slowed and authorities bond funds noticed redemptions for the primary time in six weeks.Because the bank’s strategists led by Michael Hartnett put it succinctly: “Positioning still bearish, policy bullish.”So who’s shopping for? Sure breeds of quants, for one. Momentum merchants, like commodity buying and selling advisers, are the one overextended a part of Wall Street, in line with JPMorgan.By its estimates, the momentum sign for U.S. stocks has returned to elevated ranges. The final time the overbought sign was this stretched was close to the start of this yr, simply earlier than stocks plummeted. Even so, profit-taking by momentum traders is unlikely to derail the bull market, JPMorgan strategists stated, given low fairness allocation by different kinds of traders.As for different quant traders, Nomura Securities tasks that U.S. volatility-control funds — which goal a selected stage of price swings — are lastly piling into stocks once more because the market calms. Their estimated fairness publicity stays across the second percentile in knowledge going again to 2010, that means that it was decrease simply 2% of the time, strategist Charlie McElligot wrote in a observe.In sum, with the S&P 500 buying and selling at a two-decade excessive versus the approaching yr’s earnings, stocks would possibly look dear. However few traders have really poured their cash in.For extra articles like this, please go to us at bloomberg.comSubscribe now to remain forward with probably the most trusted enterprise information supply.©2020 Bloomberg L.P.