A recent investor survey by Bank of America Corp. suggests the surge in bullish sentiment might indicate it’s time to sell global stocks.
The October survey, led by strategists including Michael Hartnett, showed a marked increase in equity allocations and a decrease in bond exposure, which has triggered a “sell signal” for global equities, Bloomberg has reported.
Cash levels in global portfolios dropped to 3.9% in October, down from 4.2% the previous month.
This level of optimism has prompted the Bank of America team to issue caution to investors.
Historically, similar signals have led to declines in global stocks, with an average drop of 2.5% over one month and 0.8% over three months following the trigger.
Source: Bloomberg
A surge in investor optimism since 2020
Investor optimism has hit its highest point since June 2020, with the survey citing several factors behind this shift.
Expectations for Federal Reserve rate cuts, economic stimulus in China, and hopes of a “soft landing” have fueled this newfound confidence.
According to the report, equity allocations nearly tripled compared to last month, rising to a net 31% overweight.
In contrast, bond allocations saw a record shift to a net 15% underweight.
Despite this enthusiasm, BofA’s Bull & Bear Indicator has not yet reached the critical “big sell signal” level of 8, but the strategists caution that market froth is growing.
Source: Bloomberg
Sector rotation and risks ahead
The optimism has led to significant sector rotation among investors, with many moving into emerging market, discretionary, and industrial stocks, while rotating out of defensive sectors like staples and utilities.
Emerging-market stocks and commodities are expected to benefit most from China’s economic stimulus, while government bonds and Japanese equities may be the biggest losers.
Other key highlights from the survey include investors’ increased focus on hedging ahead of the US elections.
A potential election “sweep” is seen as a major trigger for higher bond yields and a stronger US dollar, but could also pose a threat to the S&P 500.
Growth expectations have soared, with 76% of investors now predicting a soft landing for the economy, and only 8% expecting a hard landing.
Top risks identified by investors include geopolitical conflicts (33%), accelerating inflation (26%), and a potential US recession (19%).
In terms of positioning, the most crowded trades are long on the “Magnificent 7” tech stocks (43%), long gold (17%), and long Chinese equities (14%).
As optimism rises, the warning signals are also flashing, leaving investors to weigh the risks and rewards carefully.
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