“We quickly added more leverage when results with the tax and debt issues were settled,” Timothy Ghriskey, the chief investment officer at Solaris Group LLC, which manages about $2 billion, said in a Jan. 9 telephone interview. “We’re pretty optimistic here on the equity markets as we move into the New Year. Valuations are extremely attractive and the earnings season looks good.”

U.S. equities have traded at an average 15.5 times reported earnings since the bull market started four years ago and were at 14.8 last week, data compiled by Bloomberg show. The S&P 500’s six-decade average is 16.4.

Hedge funds are borrowing at the same time they close bearish trades on American stocks that have made up a majority of their bets even after the market began to recover following the worst financial crisis since the Great Depression.

Individuals also fled equities during that period, withdrawing about $244 billion from U.S. mutual funds following the market rout that sent the S&P 500 index to a 12-year low in March 2009, according to data from EPFR Global.

Gains Missed

Americans missed out on almost $200 billion of gains as they drained money from stocks in the past four years. Assets in equity mutual, exchange-traded and closed-end funds rose about 85 percent to $5.6 trillion since March 2009, trailing the S&P 500’s 94 percent surge, data through September compiled by Bloomberg and Morningstar Inc. show.

Confidence is only now starting to recover after daily volume on American exchanges last year slid to the lowest level since at least 2008. In the first week of 2013, $22 billion flowed into equity funds globally, the second-largest total in data going back to 1996, according to EPFR Global. U.S. equity funds took in $3.1 billion, the most since EPFR began tracking the group since 2000.

While leverage shows increased optimism, it multiplies losses when investors are wrong, according to Peter Sorrentino, who helps manage about $14.6 billion of assets at Huntington Asset Advisors in Cincinnati.

Slowing Earnings

“If you want to speed up a loss, put some leverage on it,” he said in a Jan. 9 phone interview. “There’s a fair amount of leverage being used at this juncture, maybe there’s a little too much optimism out there. It indicates investors are bullish, but if you look at the fundamentals, earnings growth has started to slow and it’s real tough to defend that.”