If an investor with a market share of $ 1 million or more believes that there is already a stock bubble – or one is coming soon – what is the correct answer? According to a new survey by E-Trade Financial, the answer is to keep investing in stocks with an emphasis on undervalued sectors of the market.

Only 9% of the millionaires surveyed by E-Trade believe the market is nowhere near a bubble. The rest of the wealthy investor set:

  • 16% think we are “full in a bubble”
  • 46% in “something like a bubble”
  • 29% believe the market is getting closer

However, these wealthy investors do not run away from the market or park money in cash. With bubble fears mounting mounting fears, the same investors say their risk tolerance increased significantly in the first quarter of 2021, and the majority expect stocks to end the first quarter with more gains.

The introduction of the Covid-19 vaccines, albeit slow to start, and the prospect of another even bigger stimulus package from President-elect Biden are causing investors to do what market history dictates: look ahead.

“There is broader recognition of an improving economy and evidence that the factors for higher market development are in place,” said Mike Loewengart, chief investment officer of E-Trade Financial’s capital management unit.

The Morgan Stanley E-Trade survey was conducted Jan. 1-7 of an online sample of 904 self-managed active investors who manage at least $ 10,000 in an online brokerage account. The millionaires record, created exclusively for CNBC, consists of 188 investors with investable assets of at least $ 1 million.

The apparent contradiction in the sustained upward movement at a time of mounting bladder anxiety is not as strong as it seems. This bull market has taken all risks and market experts continue to believe that the path of least resistance is up. Although the bullish path may require some optimization of the portfolio with a greater emphasis on undervalued sectors of the stock market.

Here are some results from the e-trade survey that show where investors are right now between risk and reward.

1. Millionaires are more bullish than the wider investing public

There’s a lot of talk right now about an overstretched market and dotcom bubble-like environment, which makes it difficult for many investors to shut down the noise. But among these wealthy investors, even as their own bubble fears mount, they are increasingly bullish and bullish than the broader investor universe. 64 percent of millionaires are bullish, up 9 percentage points from the fourth quarter of 2020 compared to 57 percent of the broader investor universe who remain bullish.

Among these investors, the percentage who said their risk tolerance increased in the first quarter rose 8 percentage points (from 16% to 24%). The majority (63%) said that it will remain at the level of the previous quarter. Only 13% of millionaires said their risk tolerance has decreased.

Wealthy investors don’t expect great returns. The largest group expects the market to grow no more than 5% this quarter. However, after the sharp rise in the markets that are already on the books, this is a safe, albeit bullish, reaction, Loewengart said. Fifty-nine percent of millionaires expect another quarterly profit in the S&P 500, with 43 percent of those seeing a profit of no more than 5 percent. Those who believe the market is due for a quarterly decline fell from 28% to 22%.

2. Further portfolio changes will be made

Even if the risk remains the mode for many, more and more investors are optimizing their portfolios. Rotation in value stocks, small-cap stocks, and depressed sectors like energy and finance is already a well-mapped phenomenon – called the “big rotation” – and these investors are no exception.

The percentage of millionaires who report making changes to the allocations in their portfolios rose 6% for the second straight quarter to almost a third (32%) overall. The percentage of millionaires who invest in cash is still very low (7%) but increased from 5% in the last quarter.

While growth stocks have outperformed in recent years, investors are taking the opportunity to move into more cyclical sectors of the market.

“Everything outside of big tech turned into better potential opportunities,” Loewengart said.

According to CFRA, small caps have underperformed the S&P 500 since late 2018.

The price growth gap between S & P 500 Growth and S & P 500 Value was at its highest level in history last August (since the mid-1970s) and is currently as large as it was in December 1999, even after a certain amount of stock rotation .

The 12-month price-performance ratio of the S&P 500 is 45% above the 20-year average. The CFRA 2021 profit increase for the S&P 500 growth component of the index is 13.3% versus 20.1% for the value group.

3. Home trading may have peaked but it is permanent

Even if millionaires are more likely to say they’re making changes to their portfolio allocations, the upside in the S&P 500 sector hasn’t changed as much as the survey suggests. This shows that names and names are given to every investor that participates in the rotation. With more cyclical games, there are still many who put their market money on the winners.

“There’s the momentum factor. People want to keep believing where they’ve seen strong returns, it will go on, but some are realizing it can’t go up forever,” Loewengart said.

While interest in financials as the sector with the greatest potential has increased slightly (3%) this quarter, a bet on a quick financial recovery, information technology and healthcare overall remain the top bets in the fall in this bull market, according to Loewengart . Healthcare (at 66%) and technology (at 53%) remain the two most popular sectors and investor interest has not declined.

Technology, for all its winnings, is hard to bet on.

“We can talk a lot about how the home trade is over and other segments will do better. However, when we see similar industry expectations, that also reflects the market tied to technology and the fact that Covid is changing the world has, “said Loewengart. “Some things are not going to be what they were before and we are going to see multiple expansion in big tech names,” he said.

He added that given recent valuations, investors should expect earnings to be more modest than the opportunity in cyclical sectors, where more stimulus and vaccine use can result in more significant valuation growth. “There is a possible change in market leadership,” said Loewengart.

4. International market opportunities are more attractive

The data shows more clearly that overseas interest is growing than that sector bets are changing significantly in the US market. This is in part because these millionaires have typically long preferred US stocks.

Millionaires are shaking their prejudices about their home country and are becoming more interested in investing outside the US. Interest rises 9 percentage points this quarter. The percentage of millionaire investors who said international markets were more attractive to them in the first quarter of 2021 rose from 27% to 36%.

“It’s definitely a big step in terms of millionaires, a significant step,” said Loewengart.

For the past three years, the S&P 500 has outperformed the international and emerging market indices developed by S&P. The last time these international markets outperformed the US large-cap index was in 2017.

While the dollar has rallied recently, its broader weakness over the past few months has been a key element of global equity performance.

“This means that the millionaire is better prepared for the opportunity,” said Loewengart.

How much of this new interest overseas is broadly based compared to China is not clear from the survey. “China could be the only G8 member to see GDP growth in 2020. This is a clear indicator that the world outside of the US, developing countries, is moving past the virus,” he said.

5. The US political risk factor has fallen sharply

If political risk and election risk were a major factor in the fourth quarter, there was a significant investor downgrade that quarter.

The end of the e-trade poll was the Georgia runoff election and the unrest at the Capitol that set the market another record. When it comes to the biggest question – the presidential election – millionaire investors are no longer nearly as concerned as they were last quarter.

The percentage of wealthy investors who see the new presidential administration as the greatest risk to their portfolio decreased from 50% to 30% this quarter. 26% of these investors are pessimistic about the outlook for the US economy under President-elect Biden, while 60% showed some degree of optimism, ranging from moderate (38%) to high (22%).

Market volatility, meanwhile, saw risk factors spike, from 18% of millionaires who viewed this as their biggest portfolio threat, to just over a quarter (27%).

6. Millionaires are less risky when it comes to the riskiest assets

The most recent phase of this bull market, the phase after Covid Spring 2020, was marked by a risk appetite for new offers, IPOs and SPACs, as well as an increase in new asset classes such as cryptocurrencies, including Bitcoin. Millionaires, while remaining at risk, are less interested in betting like this: