Are fund managers too bullish about stocks?

Stellar gains in late 2023 have contributed to an improved mood among professional investors, as evidenced by Bank of America’s (BofA) latest fund manager survey.

Fund managers are more overweight in US stocks than at any time since the heady days of December 2021, when markets were about to top out before a 10-month bear market that saw the S&P 500 lose a quarter of its value. Profit expectations are running at a two-year high, as is global economic sentiment. Interest-rate optimism is at record highs. Recession expectations have hit 19-month lows.

Nevertheless, bullishness is not yet at extreme levels. Cash allocations actually rose over the last month, as did the percentage of managers taking lower-than-normal risk levels. The number of investors overweighting stocks dipped over the last month.

European stock allocations, in particular, remain below historical norms.

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Overall, BofA says its Bull & Bear Indicator rose to 5.5 – the highest since November 2021, but below the 8.0 level that triggers a tactical sell signal. Bearish sentiment had been a strong tailwind for stocks in 2023, but that’s clearly no longer the case.

[ IMF warns central banks against fuelling market hopes of rapid rate cuts ]

[ Euro zone heading for another downturn, warns ECB vice-president ]

The survey suggests stocks may be vulnerable to any disappointments (witness recent weakness as markets reassessed the case for rate cuts), with BofA saying “new catalysts” such as global growth are “required for upside”.

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