Investors Are Betting Against a Fed Rate Hike. Wall Street Is Showing Broad Bullishness.

A closely watched Wall Street survey is showing that fund managers are overwhelmingly bullish on stocks, even as interest rates, inflation and concerns about the massive artificial intelligence investment boom threaten to complicate the outlook.

Bank of America Securities' latest Global Fund Manager Survey found investor sentiment at its third-most bullish level since 2022, according to CNBC. The optimism is already showing up in portfolios, with professional investors cutting cash holdings and significantly increasing their exposure to global equities.

Cash levels among fund managers have fallen to just 3.5%, according to the survey. That is well below Bank of America's 4% threshold for what the firm considers a contrarian "sell signal," an indication that investors may have become excessively optimistic and left themselves with relatively little protection if markets reverse course.

At the same time, managers' allocation to global equities climbed to a net 56% overweight, the highest level since November 2021. Investors have now remained overweight equities for 14 consecutive months.

The positioning reflects the extraordinary resilience of stocks despite a growing list of potential risks. Wall Street's increasingly bullish consensus appears to be built partly around expectations for a "no landing" economy, a scenario in which growth continues, unemployment remains low, and the economy avoids a meaningful slowdown even as borrowing costs stay elevated.

That view is particularly notable because fund managers appear less concerned about another Federal Reserve rate increase than financial markets overall. According to the Bank of America survey, investors do not expect the Fed to raise rates before the November midterm elections. Fed funds futures, however, continue to price in a significant probability that policymakers will deliver at least one quarter-percentage-point increase before then.

The disconnect comes as the bond market sends a considerably less comfortable signal. Long-term Treasury yields surged Tuesday to their highest levels in nearly two decades, reflecting concerns that the Fed may be falling behind inflation while investors also demand greater compensation for holding U.S. government debt amid mounting worries about the country's fiscal outlook.

Energy prices are adding another complication. West Texas Intermediate crude futures climbed above $84 per barrel as oil prices reached a three-week high, with diminishing expectations for a U.S.-Iran peace agreement raising concerns that energy costs could remain elevated.

Artificial intelligence is another potential problem as investors have poured money into companies expected to benefit from the AI infrastructure boom, while growing concerns about credit and the enormous spending required to build data centers, acquire chips and expand power capacity have raised questions about how long the investment cycle can continue at its current pace.

For now, however, those risks have done little to shake the broader bullish positioning captured by Bank of America's survey. The market itself has begun showing more caution. Major U.S. stock averages were lower Tuesday and headed for a third consecutive losing session as rising Treasury yields and oil prices pressured risk assets.