The latest global fund manager survey from Bank of America indicates that bullish investors have pushed equity allocations to their highest level in nearly five years, with very few expressing bearish views. The strategist team led by Michael Hartnett reported that a net 56% of surveyed managers are overweight stocks, the highest reading since November 2021, while cash allocations have dropped to a "very low" 3.5%.

The Hartnett team noted that "the market consensus is that the macro economy won't land, the Fed won't hike rates, AI capital expenditure won't be cut, Democrats won't win big, and bears won't gain the upper hand." However, they also cautioned that current positioning signals "continue to suggest investors should retreat or rotate within risk assets, rather than add exposure," reiterating their recent view to shift toward more defensive sectors.

This August survey reflects exceptionally optimistic investor sentiment, with respondents expecting no Fed rate hikes before the November midterm elections and no Democratic sweep that would disrupt market momentum. Fund managers widely believe the economy will not show significant weakness, and companies heavily investing in AI infrastructure will continue to ramp up spending.

Beneath the optimism, however, signs of caution have begun to seep into equity markets since the S&P 500 reached a record closing high on August 13. Concerns over rising long-term bond yields are intensifying, reflecting investor worries about inflation and the debt-fueled AI boom. Additionally, former President Trump's statement indicating no intention to extend the expired ceasefire agreement with Iran has triggered renewed oil price increases.

Bank of America conducted this survey between August 7 and 13, gathering responses from 180 participants managing a combined $525 billion in assets. The strategists noted this marks the third most optimistic monthly sentiment reading since 2022.

When it comes to AI, conviction and fear coexist. "Long global semiconductors" remains the most crowded trade among respondents, though crowding has eased significantly from last month—a net 53% selected this trade, down from 82% in July. Investors view the AI bubble as the biggest tail risk, while hyperscaler capital expenditure is considered the most likely trigger for a credit event. Despite these concerns, a net 71% of respondents expect no cut in AI spending this year, and 58% believe AI technology will not materially impact the labor market until at least 2028.

In terms of sector allocation, respondents increased their positioning in technology, banks, and energy in August, while reducing exposure to industrials and healthcare, and covering shorts in both consumer staples and consumer discretionary. Additionally, a net 16% of respondents believe gold is undervalued, the highest level since March 2023, while a net 39% view the US dollar as overvalued, up from 34% last month.