Investors Return to Stock Funds, Starting to Reverse Recent Exodus

That is a shift from earlier in the summer, when many investors assessed their losses from a brutal start to the year and headed for the exits. All told, they yanked $44.1 billion from equity funds across June and July, the first consecutive months of outflows since December 2020 and January 2021.

More recently, appetite for stock funds has returned as the market advanced from its low more than two months ago. The S&P 500 has climbed 13% since June 16.

The ascent has been uneven, to be sure. The S&P 500 dropped 3.4% over the past two sessions, as investors are still grappling with a number of issues. Inflation remains red-hot, and the Federal Reserve says it will keep raising interest rates. Plus, as the economy shows signs of cooling, there is widespread doubt that companies can post the robust earnings growth on which Wall Street is counting.

Still, with the S&P 500 having recouped a large portion of its losses for the year, some investors say it has become hard in recent weeks to sit this rally out.

“We’ve had a nice recovery from the June low, and investors are starting to feel better about it,” said David Templeton, principal and portfolio manager at Horan Capital Advisors.

Mr. Templeton is in the camp that thinks the market had fallen far enough that there were bargains to be had. He said his firm has been buying U.S. stocks, betting the market’s recent bottom may have been its low point for the year.

“We just think some of the bearishness around the economy, the fundamentals about companies, was overdone,” he said.

Investors this week will parse the latest jobless claims numbers and consumer sentiment data as they try to assess how the economy is holding up. They also will keep a careful eye on the Fed’s annual economic symposium in Jackson Hole, Wyo., and examine earnings reports due from companies including

Salesforce Inc.,

CRM -3.69%

Nvidia Corp.

NVDA -4.57%

and

Dollar General Corp.

DG -2.02%

Fund flows aren’t the only sign that investors are setting aside some of their distrust of the market’s rally: Sentiment among individual investors has been creeping higher. The most recent survey by the American Association of Individual Investors found that 33% expected stock prices to rise over the next six months, up from 18% at the lowest reading in June. Still, bullishness has remained below its long-term average of 38%.

There are indications that professional investors also are feeling a little less glum. BofA Global Research’s August fund manager survey found their allocation to equities was below the long-term average. But it had increased from July, when fund managers were the most dour on stocks since October 2008.

The early months of 2022 were a rude awakening for investors after three years in which the S&P 500 advanced by double-digit percentages. As anxieties about high inflation, hawkish central banks and the potential for an economic recession shook the markets, the U.S. stock benchmark tumbled to its worst first half of a year since 1970.

“The first half of the year was such a volatile and at times violent repricing of the stock market, I think it really spooked people,” said Larry Cordisco, co-lead portfolio manager of the Osterweis Growth & Income Fund.

Since then, corporate earnings have held up better than expected and annual U.S. inflation has eased from a four-decade high, prompting traders to dial back bets on the size of the Fed’s next interest-rate increase.

The market’s turn higher has brought a reordering of winners and losers in the stock market. Energy stocks, still easily the S&P 500’s leading sector for the year, are the worst-performing group since the June market low, with

Halliburton Co.

HAL -0.68%

and

Phillips 66

PSX -0.24%

among those losing ground.

The technology and consumer discretionary segments, by contrast, have climbed, paring their losses for 2022.

Tesla Inc.,

TSLA -2.28%

Chipotle Mexican Grill Inc.

CMG -1.96%

and

PayPal Holdings Inc.

PYPL -3.09%

are each up at least 30% since June 16.

Still, many investors are feeling cautious about the road ahead. The rebound has stocks looking more expensive after a period of lower valuations. The S&P 500 traded late last week at 18 times its projected earnings over the next 12 months, up from 15.4 times at its June low, according to FactSet.

And with economic growth under threat, money managers have raised a chorus of doubts that corporate profit growth can remain robust—a reason that some of them doubt the durability of the recent advance. Earnings among companies in the S&P 500 are expected to grow about 8% this year, according to FactSet, a forecast many investors say is too rosy.

“We’re just at the cusp of a reset of corporate earnings to the downside, and it’s hard to envision a case in which the market just incessantly rallies on that,” said Jonathan Waite, fund manager and senior equity analyst at Frost Investment Advisors.

Write to Karen Langley at karen.langley@wsj.com