Investors are all-in on stocks, and a June swoon could be next, BofA says

By Jules Rimmer

Falling cash levels, soaring sentiment mean market's a 'chip shot' away from selling

Bank of America is warning that stock markets could be facing a summer rout after investors have piled into the market.

Excessive optimism, driven by robust earnings growth has whipped up investor sentiment to a three-month peak. However, this leaves the market vulnerable to profit-taking in early June, with the severity of any decline to be determined by how high bond yields rise.

That's according the main findings of Bank of America's Fund Manager Survey for May, which published Tuesday by a team led by chief equity strategist Michael Hartnett. The report notes that Hartnett now reckons that because investor sentiment has become so bullish, markets are within a "chip shot" of hitting a technical sell signal.

FMS cash level drops to 3.9%, triggering sell signal

The eye-catching figure from the survey, conducted among 170 fund managers running almost half a trillion in assets, was the cash level that fell from 4.3% to 3.9% in the last four weeks. That was the biggest such drop since February 2024. A reading below 4% generally triggers a sell signal and it's worth noting that the median market decline, following the 24 sell signals observed in the last fifteen years, is -1%.

Some of the poll's findings show a degree of complacency on behalf of investors. Only 16% of respondents, for example, expect Fed rate hikes in the next twelve months, despite 2-year Treasury note BX:TMUBMUSD02Y yields of 4.1% - yypically interpreted as the best guide to the future Fed Funds rate (FF00), now at 3.50-3.75% - suggesting they are probable.

Concerns that the Fed may "be behind the curve" on the threat of inflation, or not forward-thinking enough in terms of tackling it, explains why almost two-thirds of investors surveyed believe a 6% yield on the U.S. long bond BX:TMUBMUSD30Y is a likely target.

Just 16% of investors expect the Fed to hike rates in the next 12 months

The relatively sanguine expectations for interest rates also seems at odds with the fact that less than half of the survey's respondents expect the Strait of Hormuz to be free for the transit of crude by the end of June. Not surprisingly, the survey shows the consensus among investors for the oil price (BRN00) at year-end to be around $85.

The most crowded trade, according to investors, is the long global semiconductors SOX bandwagon, identified by 73% of them. The biggest tail risk, or probability of a rare but catastrophic market development, they acknowledged was inflation. This might explain why the overweight position in commodities is the highest the FMS has ever registered, and why bonds are the biggest underweight seen since June in 2022 at the height of the spike in inflation to 9% in the U.S.

Using the survey's findings to suggest possible contrarian trade ideas, Hartnett highlights the potential for a trend reversal in fixed-income, the dollar DXY, unloved U.K. assets UK:UKX and consumer stocks XLY that have foundered as gasoline prices have jumped at the pump.

-Jules Rimmer

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05-19-26 0828ET