Investors have been growing more confident during this year’s remarkable stock market rally, but their optimism may pave the way for a challenging second half, warns Bank of America investment strategist Michael Hartnett. The bank’s August Global Fund Manager Survey reveals that market professionals have reduced their cash allocations to a 21-month low, and they are increasingly optimistic about the economy’s ability to withstand challenges and avoid a recession. This shift in sentiment, which contradicts the previous pessimistic outlook, has played out in various ways and has the potential to impact the market going forward.
The Confidence of Investors in the Stock Market Rally Could Lead to a Challenging Second Half
The impressive stock market rally this year has fueled growing confidence among investors. However, this confidence may set the stage for a more challenging second half of the year, according to Michael Hartnett, an investment strategist at Bank of America. The ongoing rally, which has seen the S&P 500 increase by over 16%, has led to a decrease in bearish positioning among investors. This shift in sentiment could potentially impact risk assets in the second half of the year.
Bank of America Survey Shows Decrease in Cash Allocations and Optimism in the Economy
The August BofA Global Fund Manager Survey reveals that market professionals have reduced their cash allocations to a 21-month low. The cash allocations in portfolios now stand at 4.8%, below the traditional buy signal threshold of 5%. This decrease in cash allocations highlights the growing optimism among investors. Furthermore, the survey shows that 42% of respondents believe a recession is “unlikely,” compared to just one in 10 respondents in November 2022. If a recession does occur, fund managers expect it to be mild, with 65% predicting a “soft landing” scenario.
Market Professionals Expecting a Soft Landing and Lower Inflation
Market professionals participating in the survey are increasingly optimistic about the economy. They expect a “soft landing” even if a recession does occur. Additionally, 81% of survey respondents expect a global easing of inflation over the next 12 months. This expectation of lower inflation is feeding the conviction that interest rates will decrease. Despite the Federal Reserve’s efforts to fight inflation and the expansionary fiscal policy, investors remain optimistic about the future.
Optimism in Company Earnings Reaches Highest Point Since February 2022
One notable finding from the survey is that optimism in company earnings has reached its highest level since February 2022. Despite various challenges and uncertainties, investors are increasingly positive about the earnings potential of companies. This optimism may further fuel the stock market rally in the coming months. However, it should be noted that the stock market can be unpredictable, and investor sentiment can change rapidly.
Allocation to Stocks Increases, Contrarian Play Suggested for the Equity Side
According to Michael Hartnett, the allocation to stocks is the least underweight as a share of portfolios since April 2022, marking a notable increase. This shift in asset allocation highlights the growing confidence among investors. From a contrarian perspective, Hartnett suggests considering a “long utilities, short tech” trade on the equity side. Additionally, he advises keeping an eye on the real estate investment trust (REIT) sector, which could indicate the health of the overall market. If the REITs fail to recover despite a positive economic outlook, it could signal the potential for a recession.
The stock market rally this year has boosted investor confidence and led to a decrease in cash allocations as market professionals expect the economy to weather its challenges and avoid a recession. However, this growing optimism could potentially pave the way for a more challenging second half. It remains to be seen how the stock market will perform in the coming months, but investors should be cautious and consider contrarian plays in their portfolios.
Analyst comment
Overall, the news can be evaluated as neutral. The market may face challenges in the second half due to the growing confidence of investors in the stock market rally. However, there is also optimism about the economy’s ability to withstand challenges and avoid a recession. Investor sentiment can change rapidly, so caution is advised.
