Investor confidence has climbed close to historically elevated levels, but Bank of America believes markets have not yet reached the conditions typically associated with a major turning point for risk assets.
According to the bank’s latest Global Fund Manager Survey, the Bull & Bear Indicator rose to 8.9 in June, triggering a technical sell signal. However, investment strategist Michael Hartnett noted that cash allocations edged higher to 4.1% from 3.9% in May, suggesting investors have not become fully committed to risk.
Drawing on historical survey data, Hartnett said “this is not a ‘big top’ for risk assets,” adding that any significant market peak “will be signaled by bonds & voters.”
Growth and Earnings Expectations Continue to Improve
The survey showed growing optimism around the global economic outlook, with expectations for both growth and corporate profits reaching their highest levels in three months.
At the same time, investors are increasingly preparing for higher interest rates. Expectations for rising rates reached their highest level since September 2022, while 40% of fund managers now anticipate Federal Reserve rate increases within the next year, up from 16% in the previous survey.
A majority of respondents, representing 55% of those surveyed, expect Federal Reserve Chair Kevin Warsh to deliver a “hawkish hold” at this week’s Federal Open Market Committee meeting.
Investors Trim Exposure to Equities and Technology
Although sentiment remains constructive, portfolio positioning became slightly more defensive during June.
Global equity overweight positions declined from 50% to 38%, while exposure to technology stocks fell from 33% to 26%.
Fund managers also reduced their allocation to European equities, creating the region’s largest underweight position since December 2024.
Meanwhile, investors increased exposure to Japanese equities, materials companies and banking stocks. Gold was also viewed as fairly valued for the first time since February 2024.
Inflation and AI Bubble Concerns Dominate Risk Outlook
When asked about the biggest threats to markets, fund managers identified a potential “second wave inflation” scenario as the leading risk, cited by 34% of respondents.
An “AI bubble” ranked second, selected by 28% of participants.
The survey also found that long positions in global semiconductor stocks remain the most crowded trade in financial markets. The strategy was identified by 80% of respondents, the highest reading ever recorded in the survey.
Contrarian Opportunities Emerging
Looking ahead to the second half of the year, Bank of America highlighted several areas that could offer contrarian investment opportunities.
The bank identified long-duration bonds, European equities and consumer-related stocks as its preferred contrarian trades heading into the summer months.