Bank of America survey shows cash levels plunge and contrarian trades emerge

The warning signs are flashing amber for stocks as Bank of America’s latest Global Fund Manager Survey shows a dangerous mix of euphoria and complacency among institutional investors.

Investors are more likely to hedge and buy cheaper areas of the market than hit the sell button. Picture: Angela Weiss/AFP

A monthly poll of global fund managers regarded as one of the most reliable contrarian indicators in financial markets, shows investor sentiment has reached its most bullish levels since February.

Cash levels have dropped to a 12-year low of 3.9 per cent, triggering a contrarian “sell signal” for Bank of America’s “cash rule” for the first time since the rally began in April.

It comes after the BofA Global Flow Trading sell signal was triggered last week.

The US bank’s Global Breadth Rule remains close to a “sell” signal. But its Bull & Bear Indicator is at 6.2 versus levels above 8.0 needed for a more significant sell signal.

Still, when institutions get this optimistic, markets can stumble.

The median four-week loss for the S&P 500 after the past 17 cash rule sell signals going back to 2011 has been 2 per cent. The worst drawdown in this situation has been 29 per cent.

Consistent with the recent move out of cash, the survey shows a sharp shift in US equity positioning.

Fund managers went from net 36 per cent underweight US stocks in June to just 23 per cent underweight in July – the largest monthly jump in allocation since December 2024.

The current allocation is still one standard deviation below its long-term average.

But it’s a remarkable about-face from the deep pessimism that gripped markets in April. In April, a net 82 per cent of respondents expected weaker global economic growth. By July, it collapsed to just 31 per cent, the biggest three-month rise in growth expectations since April 2024.

This shift from fear to greed that should make investors cautious enough to hedge their bets.

CNN’s Fear & Greed index hit “Extreme Greed” in recent days – not that it maps well to the S&P 500.

Sentiment is “getting toppy” but stock overweights aren’t extreme, bond volatility is low and “greed is always much harder to reverse than fear”, says Bank of America investment strategist Michael Hartnett.

Investors are more likely to hedge and buy the cheaper areas of the market than hit the sell button.

But the survey shows some crowded trades that could unwind violently if sentiment sours.

For the first time in the survey’s history, “short US dollar” has emerged as the most crowded trade, cited by 34 per cent of respondents. This represents a significant shift from the “long Magnificent Seven” trade that dominated positioning from April 2023 to March 2025.

European assets have perhaps become a bit too fashionable.

Fund managers are now more overweight the euro than at any point since January 2005 and eurozone stock allocation has hit a four-year high.

This enthusiasm for European assets comes despite persistent economic headwinds and political uncertainty across the continent.

Perhaps most tellingly, tech stocks have staged a dramatic comeback in fund manager allocations. The sector has seen its biggest three-month increase in positioning since March 2009.

Fund managers went from net 1 per cent underweight to net 14 per cent overweight in a single month.

This tech rotation coincides with growing optimism about artificial intelligence’s economic impact. Some 42 per cent of fund managers now believe AI is already boosting productivity, up from previous surveys where most expected benefits to materialise in 2026 or later.

However, BofA’s contrarian analysis suggests these consensus positions are vulnerable to a sharp reversal. The bank identifies short US dollar, long US tech, and long European banks as the trades most at risk from any bond market volatility or earnings disappointment.

The survey also reveals telling shifts in recession expectations.

Net 59 per cent of respondents now consider a global recession unlikely over the next 12 months, a dramatic reversal from April when 42 per cent said recession was probable. Some 65 per cent expect a “soft landing” for the global economy, with just 9 per cent anticipating a hard landing.

This optimism extends to corporate earnings – 42 per cent expect second-quarter US results to surprise on the upside versus 19 per cent saying they will surprise on the downside.

The consensus aggregate earnings estimate “bar” for the S&P 500 has been set low at 4.8 per cent year on year. And with investors still underweight US stocks versus history, there may be room for an earnings season rise. Then again, if more fund managers expect earnings to beat, any misses could be punished, particularly if underweight US stocks is the new normal.

The Federal Reserve remains a key focus, though expectations for aggressive easing have moderated. Just 11 per cent expect a rate cut in July, but 47 per cent see two more cuts by the end of the year.

Trade war concerns remain the biggest “tail risk”, with investors expecting final US tariffs on the rest of the world to reach 14 per cent.

For contrarian-minded investors, the survey suggests several potential opportunities.

BofA identifies shorting the euro, favouring Japan over European stocks, and preferring value over growth as the best contrarian relative trades.

The challenge for market participants is timing. While sentiment indicators suggest caution, momentum can go longer than fundamentals suggest.

Nevertheless, when cash levels trigger sell signals and crowded trades reach historic extremes, prudent investors should prepare for increased volatility ahead. As the survey’s own data suggests, periods of maximum optimism rarely coincide with maximum opportunity.

Originally published as Bank of America survey shows cash levels plunge and contrarian trades emerge