Expect Rate Cuts, Not Recession: Fund Managers Most Bullish On Stocks In Over 2

Most investors do not expect a recession in the next 12 months.

That’s according to the latest Global Fund Manager Survey (FMS) conducted by Bank of America. The report, released Tuesday, shows optimism in the stock market at its highest level since November 2021 buoyed by expectations that inflation will decrease and short-term interest rates will get cut.

“Our broadest measure of FMS sentiment, based on cash levels, equity allocation, and economic growth expectations, rose to 6.0 from 5.8, and a low of 0.3 in [October 2022],” the report stated.

The survey, led by the firm’s chief investment strategist Michael Hartnett, sourced commentary from over 200 financial experts, including portfolio managers, analysts, economists, and chief investment officers. The results highlight significant shifts in market sentiment and asset allocation.

Their bullish attitude is likely buoyed by rising expectations that interest rates will soon get cut.

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BofA April Global FMS: Key Insights

• 64% of investors do not expect a recession in the next 12 months.
• For those that do, 19% expect it to occur in the first half of 2025,
• Just 14% expect a recession sometime in 2024.
• On the global economy, 78% of FMS investors say a recession is “unlikely” within the next 12 months, in line with last month’s expectations.
• Rate Cut Expectations Fuel Bullish Outlook: A dominant 83% of investors now anticipate that short-term interest rates will be lower in the next 12 months. That’s an increase from 81% in April.
• Expectations are fueled by a notable rise in the number of investors who foresee a decrease in inflation—69% in May compared to 63% in April.
• Cash Levels and Asset Allocations Indicate Confidence: The average cash level among fund managers has decreased to 4% of assets under management, down from 4.2% and marking the lowest level since June 2021. This reduction in cash reserves coincides with an increase in stock allocations, which are at their highest since January 2022. Currently, fund managers are net 41% overweight in equities, a 7 percentage point increase month-over-month and 0.6 standard deviations above the long-term average.
• Policy Expectations and Tail Risks: A substantial 82% of respondents expect the Federal Reserve to initiate rate cuts in the second half of 2024, with 78% predicting two to three or more cuts over the next 12 months. Amid these policy expectations, 47% of fund managers foresee lower bond yields. Despite the bullish sentiment, investors acknowledge vulnerabilities.
• Top ‘Tail Risk’: Higher inflation remains the top “tail risk,” cited by 41% of FMS investors, followed by geopolitical concerns (18%) and the risk of an economic hard landing (15%). A record 55% of respondents believe fiscal policy is “too stimulative,” indicating concerns that government spending could exacerbate inflationary pressures.
• Commodity Investments On The Rise: The allocation to commodities has also seen a sharp increase, with investors now 13% overweight, up from 11% and marking the largest overweight position since April 2023. Over the past three months, the increase in commodities allocation (up 18 percentage points) is the largest since August 2020, reflecting growing concerns about inflation, which remains the top “tail risk” cited by 41% of fund managers. In terms of performance, The Invesco DB Commodity Index Tracking Fund (NYSE:DBC) has risen over 5% in the last two months.
• Investors Like Europe, Avoid Real Estate: There has been a modest defensive rotation in asset allocations, with a shift towards staples from industrials. However, in absolute terms, there are significant overweight positions in large-cap growth stocks, healthcare, technology, Europe, and commodities.
• Conversely, there are considerable underweight positions in real estate investment trusts (REITs), utilities, the UK, and discretionary sectors. Notably, REITs are at their most underweight level since June 2009, down 13 percentage points month-on-month to a net 28% underweight. The Real Estate Select Sector SPDR Fund (NYSE:XLRE) has fallen 4% year to date.
• Crowded Trades and Contrarian Opportunities The most crowded trade identified by fund managers is the “long Magnificent 7″ stocks, cited by 51% of respondents, followed by “long US dollar” (12%) and “short China equities” (11%). On the contrarian side, trades that would benefit from stagflation or a hard landing include shifting from stocks to cash, favoring REITs over commodities, and choosing utilities over technology.

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