Recent stock market surges are indicative of heightened investor optimism, reaching levels unseen in over two years. Bank of America’s February Global Fund Manager Survey, released on Tuesday, unveiled a surge in broad-based investor sentiment, registering at 4.1, up from 2.9 the previous month and the highest since January 2022. The survey, encompassing around 200 participants managing over $500 billion in assets, highlighted the pivotal role of cash levels, equity allocation, and economic growth expectations in the improvement of overall sentiment.
While the sentiment boost is evident, it’s noteworthy that stock market sentiment, as indicated in Bank of America’s survey, remains lower compared to other recent historical points. The survey revealed that two-thirds of investors anticipate a soft landing for the economy in 2024, envisioning a scenario where inflation returns to the Federal Reserve’s 2% goal without a severe economic downturn. Significantly, this marks the first time since April 2022 that investors are not projecting a global recession.
The positive outlook aligns with surprising economic data in the US this year, with the Atlanta Fed projecting a robust annualized growth rate of 3.4% in the first quarter. Last week, Deutsche Bank adjusted its long-held recession prediction for the US economy, citing strong growth prospects and little evidence of labor market deterioration.
Investors’ growing confidence is mirrored in their positioning, with allocations to US stocks hitting their highest level since November 2021, and tech stock allocations reaching their peak since August 2021. This shift is accompanied by a decline in cash positions, with fund managers’ average cash level dropping to 4.2%, marking a 55 basis point decrease from the January survey.
While the decline in cash positions historically signals a positive trajectory for equities, the report cautions that a reading of 4% or lower in cash allocations might trigger a “sell” signal.
Despite the upbeat sentiment, the exuberance on Wall Street has sparked debates. Some, like Capital Economics’ John Higgins, foresee further gains, suggesting that valuations are lower than during the late 1990s tech bubble. However, JPMorgan’s Marko Kolanovic maintains a more cautious stance, emphasizing the unfavorable risk-reward scenario for equities trading at all-time highs, citing concerns over market internals, valuations, and geopolitical risks.
