Despite a remarkable stock market rally since October 2022, investors have surprisingly been pulling money out of equity funds, opting instead for safer assets like bonds and money market funds. This contrarian behavior suggests that investors may be missing out on potential gains, setting the stage for a future FOMO rally, according to Fundstrat's Tom Lee.

The S&P 500 has soared approximately 30% since the bear market low in October 2022, while the Nasdaq 100 has surged over 50%. However, instead of capitalizing on this upward momentum, investors have withdrawn a staggering $240 billion from stock mutual funds and ETFs since October 2022. During the same period, they invested $107 billion in bond funds and a whopping $1.1 trillion in money market funds.

This significant shift in fund flows implies that investors sold stocks at a time when they should have been buying them, potentially fueling a future FOMO rally in the stock market, according to Lee. This sentiment coincides with a recent surge in equity fund flows, marking the biggest two-week jump since February 2022.

Cash has been the preferred asset class for investors since the Federal Reserve began aggressively raising interest rates last year. According to Fed data, retail investors hold a record $1.6 trillion in money market funds, taking advantage of attractive 5% interest rates. Total money market fund assets, including both retail and institutional investors, have skyrocketed to a record $5.7 trillion. This substantial pool of cash could serve as the catalyst for further stock market gains if investors regain confidence in the sustainability of the rally that began just over a year ago. Lee maintains a year-end S&P 500 price target of approximately 4,800, representing potential upside of 5% from current levels.

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