Bank of America Fund Manager Survey Shows Stock Market Has Yet to Show Signs of Capitulation Selling

Investing.com - According to the latest Global Fund Manager Survey (FMS) by U.S. Bank, global investors shifted to a more cautious stance in March, but their holdings remain far from levels typically associated with market capitulation.

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The survey shows that investor sentiment is deteriorating as geopolitical tensions and inflation concerns have replaced earlier optimism. The strategy team led by Michael Hartnett stated in the report: “In March, the FMS turned bearish as concerns over Iran and private credit ended the recent ‘bubble rally’ sentiment,” with global economic growth expectations significantly declining and cash holdings rising.

Cash allocations increased to 4.2%-4.3%, the largest monthly rise since 2020, while the broader sentiment indicator fell to a six-month low.

Despite this, positioning indicators remain well above levels seen at previous market bottoms. The strategists noted: “U.S. Bank’s positioning indicators are far from the recent major lows/extreme bearish levels seen at good entry points for stocks and credit.”

Macro outlook has weakened considerably. Net 7% of respondents expect the global economy to strengthen, down from 39% a month earlier, while inflation expectations surged to a net 45%.

The survey also shows a sharp decline in optimism for rate cuts, with only a net 17% expecting short-term interest rates to fall, the lowest since February 2023. Despite this shift, recession fears remain limited, with only 5% of investors expecting a hard landing, 46% expecting “no landing,” and 44% expecting a soft landing.

Risk perception has also changed. Geopolitical conflict is now seen as the biggest tail risk, mentioned by 37% of respondents, while 63% believe private equity and private credit are most likely sources of systemic events.

The broader macro environment is increasingly viewed as stagflationary, with 51% of investors expecting growth below trend and inflation above trend.

Meanwhile, 51% of investors believe AI stocks are not in a bubble. Overcrowded positions still exist, with “long gold” and “long global semiconductors” listed as the most popular trades.

The survey also indicates a shift toward defensive rotation in asset allocation, with investors reducing equity exposure to a net 37% overweight and increasing cash holdings, while maintaining strong positions in commodities, with a net 34% overweight, the highest since April 2022.

U.S. Bank states that emerging market stocks remain a key overweight area, reaching the highest level since 2021, while investors maintain a net underweight in the dollar.

Sector allocations also reflect a move toward more defensive sectors, with outflows from consumer discretionary and banking sectors, and inflows into healthcare, consumer staples, and cash. Conversely, investors remain underweight bonds and consumer stocks.

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