Is Wall Street running out of steam RBC warns of stock fatigue

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•  09 Sep 2025
 

Market concerns are growing as capital flows are weakening, hedging costs are rising, and the Fed may actually serve as a catalyst for liquidations, these are the reasons behind RBC’s warnings.

The stock market has been in a strong period, with the S&P 500 breaking records. But signs are starting to emerge that point to a potential pause—and possibly even the beginning of liquidation. Less new money is flowing in, sellers are waiting for opportunities to take profits, and even large institutions are cutting exposure. That’s the picture painted by senior strategists at major banks. RBC Capital warns that the market is showing signs of “fatigue” According to them, capital flows into U.S. equity funds have slowed compared with earlier in the year, and in some cases, have even turned into outflows.

Global flows, investments by U.S. and European investors into stock funds worldwide show a similar pattern. The trend is still positive but is steadily moderating. RBC calls this “market fatigue” and explains that weakening demand could soon flip into rising supply.

Another point of concern for RBC is retail investors. They have been pouring money into equity funds in recent months, but inflows are slowing as they also sense recent profit-taking. At the same time, some institutional managers are trimming exposure. According to Deutsche Bank, entities that until recently were “balanced” in their equity allocation have now moved to “underweight,” meaning they are cutting back on stocks. Systematic trading funds, which rely on algorithmic models, have also reduced exposure to the S&P 500 and Nasdaq 100 in recent weeks. These trend-following funds exiting positions may be a signal that momentum is fading.

The options market is also flashing warning signs. Investors are buying more protection on major indices like the S&P 500 and Nasdaq 100, pushing the “skew” index higher. A steeper skew indicates greater demand for downside protection, evidence of growing investor anxiety.

In contrast, skew levels on smaller indices like the Russell 2000 remain flat. The market sees greater risk in large-cap stocks trading at record highs and less concern in small caps.

Another telling sign is trading volumes in single-stock options have dropped significantly, suggesting investors are dialing back on risk-taking.

All of this comes as investors await the Fed’s next decision. The latest jobs report came in weaker than expected, raising the odds of an interest rate cut. But here’s the paradox: a Fed cut could spark a classic “sell the news” reaction, with investors using the good news as an opportunity to lock in gains. In other words, what the market has been anticipating as a positive catalyst could instead mark the beginning of a pullback if it’s perceived as “the end of the story”

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