Fund managers are bullish. Bank of America warns of trouble ahead if the Fed doesn't cut.

By Jules Rimmer

Cash levels of 3.7% or lower have triggered negative returns for equities every time it's happened since 2002.

The most crowded position is Mag7 stocks but the biggest fear is an AI bubble.

Strategists at Bank of America warn that the optimism expressed by fund managers could provide an air pocket for stocks to fall into if the Federal Reserve doesn't cut interest rates at its upcoming meeting.

Bank of America on Tuesday released the November edition of its fund manager survey, finding a composite measure that is based on cash levels, equity allocation and global growth expectations at the highest level since February.

Bank of America's fund management survey for November highlights clear and present danger: investors are the most overweight stocks they've been since February, portfolio cash levels of just 3.7% are generating a technical sell signal and that "positioning is a headwind, not tailwind for risk assets."

If a rate cut doesn't materialize in December when the Fed next meets, speculative froth in the market will correct, they say. Financials and emerging markets are the most susceptible to what chief investment strategist Michael Hartnett calls a "proper Q4 risk-off move."

Perhaps the most compelling predictor of short-term direction is that cash level statistic. Cash levels have hit 3.7% of portfolios on 20 occasions since 2002, and every time, stocks SPX fell while Treasurys rallied in the following three months.

Cash levels have triggered a sell signal

Other worrying indicators of possible complacency among fund managers that the report captures are: that 53% of investors expect a soft landing in the U.S.; that global growth expectations have turned positive for the first time this year and that commodities are most overweight in portfolios since September 2022.

The No.1 tail risk identified by respondents was an AI bubble. The tension is illustrated by the findings that more than half of those surveyed thought AI was bringing a productivity boost to the U.S. economy, but a net 20% think the hyperscalers are overinvesting.

The most bearish catalysts investors fear over the next year are a rise in inflation and the Fed turning hawkish, which chimes with what Hartnett has been predicting in his weekly Flow Show strategy notes. There, he has been making the point that bubbles only burst when interest rates reverse direction and start to rise.

The survey detects a shift in sentiment toward healthcare stocks where positioning is the most optimistic for three years. This has been borne out by the performance of the healthcare exchange-traded fund XLV that bottomed out in August and has been rallying since.

Also read: This sector is heating up as investors get skittish on tech. Why it may be the dark horse for 2026.

Looking out into 2026, respondents think the best-performing assets will be international stocks ACWX and the best-performing currency will be the Japanese yen (USDJPY), especially if the Bank of Japan ever does make that interest-rate hike.

Based on positioning, Hartnett points out that going long out-of-vogue U.K stocks UK:UKX and the U.S. retail sector XRT, while disfavoring emerging markets EEM and healthcare would be the standout contrarian trades.

The Bank of America survey was conducted in the second week of November with 172 respondents, responsible for $475 billion of assets under management, answering questions.

-Jules Rimmer

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11-18-25 0735ET