Chip index's climb is giving fund managers a fear of heights, Bank of America finds

By Jules Rimmer

Eight in 10 respondents to bank's global fund-manager survey say they view semiconductors as a crowded trade

Semiconductors may well be the riskiest trade right now.

A day after the Philadelphia Semiconductor Index SOX racked up another all-time high with a 5% spike, institutional investors, as reflected in the monthly Bank of America global fund-manager survey, are warning that the chip trade is the most crowded long position among risk assets.

The iShares Semiconductor exchange-traded fund is now up 99% for the year, mirroring moves of a similar dimension for the Asian chip makers Taiwan Semiconductor (TSM), Samsung Electronics (KR:005930) and SK Hynix (KR:000660). A record 80% of respondents to Bank of America's survey thought semiconductors were the most consensus long position, but, as other findings from the poll illustrated, this doesn't necessarily mean that investors will sell them.

Long global semiconductors are called the most crowded trade in the May survey.

In fact, the title of B. of A. chief equity strategist Michael Hartnett's roundup of investor sentiment for May is "Frozen Bulls" precisely because fund managers seem reluctant to reduce exposure even as they express discomfort with some key signals. Bank of America's Bull & Bear Indicator, for instance - a proprietary measure using a handful of inputs to gauge sentiment - still stands firmly in "sell signal" territory with a reading of 8.9 out of 10.

Moreover, fund-manager expectations of rate hikes from the Federal Reserve continue to move up. The percentage of survey respondents who think the Fed will hike rates in the next 12 months moved up from 16% to 40%, while more than half of them anticipate a "hawkish hold" from new Fed chief Kevin Warsh's first meeting. Cash levels, usually interpreted as a guide to caution among fund managers, rose to 4.1% from 3.9%.

More than half of survey respondents expect Kevin Warsh and company to hold U.S. rates steady but with a hawkish tilt this week.

The explanation offered by Hartnett for investors to generally change their bullish positioning mostly rests on his opinion that the history of his survey doesn't suggest the present moment is a "big top" for risk assets. That would only be confirmed by a major move in bond markets. A more likely outcome, Hartnett suggests, is for "traders to take summer chips off the table" and reduce exposure in anticipation of seasonally quieter volumes and markets.

The major tail risks highlighted by Hartnett are "second-wave inflation" resulting from the energy crisis and an "AI bubble" that has featured among investor concerns for a long time. Of the 170 survey respondents, responsible for running almost half a trillion in assets in aggregate, 34% pointed to inflation and 28% to artificial intelligence as tail risks.

Hartnett repeats a view from last week's Flow Show strategy note in which he picked consumer stocks as his preferred contrarian play to benefit from the peace dividend should the conflict with Iran conclusively end. The State Street Consumer Discretionary Select SPDR ETF XLY is still effectively flat for the year. Hartnett also suggests looking at European stocks (FXXP00), bonds and real-estate investment trusts.

Two more interesting developments: First, just 1% of participants now think gold (GC00) is overvalued - a 26-month low - and, second, only 3% of those canvassed are now underweight the dollar DXY, the lowest since U.S. President Donald Trump, on his "liberation day," announced a new global tariff regime.

-Jules Rimmer

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06-16-26 0828ET