Hi everyone, and welcome to the December Institutional Investor Indicator Update, otherwise known as the three I's.

My name is Kayla Ceder, and I am one of the global macro strategists here at State Street Markets.

So let's go ahead and dive into what institutional investors were doing in markets and what it can tell us about the overall investment environment.

So,

Real money institutional investors ended the year on a pretty risk-on note.

What we can see on the left-hand side chart here is our behavioral risk scorecard.

So what this is, is a scorecard that looks at flows and holdings across multiple asset classes and creates one score to determine whether or not the environment is risk-on or risk-off.

And so throughout December, we saw real money

investors be pretty continually risk on.

There is a little bit of neutral risk sentiment for a little bit, but they ended the year with a plus eight reading.

And to put that plus eight reading into context, what we have on the right hand side is the average BRS score.

So the average behavioral risk score for each month, and then the at what the average score was for 2025.

And there's two takeaways here.

One is that throughout much of 2025,

risk appetite was generally positive, but also it was positive in an above average kind of way.

So the next question is, can this risk positivity that we saw throughout 2025 and saw in December continue moving forward?

And I think there's two things that we generally look at.

One is looking at how widespread that risk appetite is.

Is there a lot of breadth to that risk activity or is it quite narrow in scope?

And so what we see on the left hand side chart here is that it's actually quite broad.

So we have positive risk appetite in the equity space, fixed income space, FX space, as well as the commodity space.

The risk, though, is that positioning is already overweight risk assets.

And so what that means is that if there is a risk averse event,

that causes investors to get nervous, there is room to unwind those positions.

So I kind of classify this as the risk of the risk.

And what we see on the right hand side chart is the average risky positioning for every month and the average for 2025.

And so what we can see is that positioning in 2025 is actually well above what we typically see.

We typically see

average risk positioning around neutral.

And right now we're at plus five.

And so what that means is that if there is a risk off event that takes markets by surprise, there is plenty to plenty of room to unwind some of those risk on positions.

But that doesn't guarantee we're going to be we're going to see a risk event occur.

One thing that we're looking at is concentration risk.

And

Within the equity space, real money investors continue to be very concentrated within just a few sectors, primarily tech.

So what we have here on the left-hand side is changes in positioning in U.S.

stocks across sectors since Liberation Day.

And heading into the end of 2025, we continued to see increased allocation towards tech.

And so where it stands now is that really the only two overweights are tech and communications.

So a lot of concentration tied to this AI story.

On the flip side, we see underweights in places like healthcare, real estate, industrials.

and so on and so forth.

And so the question around the AI trade is, there reasoning to increase exposure from here, or should investors rotate?

And then secondly, if the answer to the first question is yes, we should increase allocation to tech, is there even room to continue to do that?

So one thing we can look at is we can get more granular in the positioning data.

And what we've seen on an industry group level is that there is room to add exposure to tech via software.

So real money investors continue to decrease their allocation throughout the second-half of last year to software where now positioning is just below neutral.

And this is pretty atypical.

If we were to expand the right-hand side chart out to, say, early 2000s, what you would find is that it's very rare for positioning to be around neutral or underweight in software.

And so what this tells us is that if investors are looking to add exposure to tech, one place they could do it that's not crowded is within software.

Now, taking a step back, what do we see in terms of fundamental strength within tech?

And will that continue to drive appetite further from here?

One catalyst would be earnings.

And what we've seen so far is that expectations for Q4 earnings season, which will start at the beginning of 2026, have continued to become more positive.

And so this aligns with the positioning we already see.

So this indicates that real money, this supports the positioning we've already seen so far.

Additionally, when we look at fundamentals, what we see is that, you know, tech continues to have strong fundamentals.

So these positions are supported by fundamentals such as high levels of relative ROE compared to other parts of the market.

And this really pushes back on concerns around beta risk.

So how about FX?

Will trends we saw throughout 2025 and December of 2025 continue into 2026?

So far, the answer is yes.

So a major trend we saw throughout the year was selling of the dollar.

And that's something that we continue to see throughout December.

And so what you can see on the left-hand side is that flows continue to signal strong selling of the dollar despite already underweight positions.

In fact, what you see is that the dollar is the only currency where investors are both underweight and continuing to net sell.

Now,

Additionally, the selling is quite broad.

So what we see on the right-hand side is all of those pairs flows.

And across the majority of pairs, we continue to see dollar selling, especially against currencies like Kiwi, Aussie, Sterling, Euro, the CAD as well.

And one of the reasons why the dollar continues to struggle is central banking policy and expectations for the Fed relative to other central banks.

And so what this chart is showing is the amount of cuts or hikes that are expected to come in 2026.

And so you can see the Fed are all, the Fed all the way on the left-hand side, where it shows the market's expectations of cuts from the Fed.

And really, majority of other central banks are expected to either hold policy steady

or even increase and increase or hike rates next year.

And so this puts the dollar in a more vulnerable position where it supports further weakness from here compared to all of these other central banks.

And then finally, treasuries.

So what we saw throughout much of 2025 was very little appetite from real money investors for U.S.

treasuries, both domestic and cross-border.

And so what the right hand side chart is showing you is flows throughout the year.

And what changed in December is that we started to see a bit more or a bit less selling of U.S.

treasuries.

It looks like this was primarily driven by the domestic buyer or by the domestic funds.

because we saw flows decrease or increase rather to around the 50th percentile from below the 25th percentile.

And so signaling that selling was starting to slow.

This looks like this is was more concentrated at the front end of the curve.

So you can see that on the left hand side chart where flows continued to be or flows were primarily positive in that one to three-year maturity range.

So there you have it.

Overall, investors were pretty risk-on into the end of the year, and it looks like there's a lot of-- it looks like those trends are set to continue into next year.

So good luck in 2026.