The latest Bank of America Global Fund Manager Survey showed investors have become less optimistic about the macroeconomic outlook, while positioning in technology stocks remains near its most extreme level in six years. The survey was conducted between October 2 and October 8 among 161 participants managing $453 billion in assets.
The Bank of America Global Fund Manager Survey (FMS) is one of the most influential monthly reports in the financial world. It polls roughly 200 to 400 institutional fund managers (people managing hundreds of billions of dollars in hedge funds, pension funds, and mutual funds) to see how they are positioned in the markets.
The survey is often used as a contrarian indicator because extreme positioning can reveal where consensus trades are vulnerable to disappointment. However, crowded positioning alone is not a sufficient reason to bet against a trend. The opportunities come when stretched positioning coincides with a catalyst that changes market expectations.
Fund managers are now more overweight technology stocks than at any point since August 2020. The proportion of respondents overweight the sector increased to 37% from 30% in September, while global semiconductors remain the most crowded trade. At the same time, investors have made their largest reduction in bank exposure since March 2023. Although sentiment has weakened, investors are still broadly positive on the macroeconomic outlook. That leaves equities vulnerable if economic activity or corporate earnings disappoint.
The survey showed a disorderly rise in bond yields as the biggest tail risk to markets, followed by an AI bubble. Short US Treasuries is the second-most crowded trade. If inflation moderates or economic growth deteriorates, Treasury yields could fall and force investors to unwind bearish bond positions.
Moreover, for the first time in several months, investors have started to turn negative on the global growth outlook. A net 4% now expect the global economy to weaken over the next 12 months. Further deterioration in growth expectations could weigh on stock markets and lead to a fall in Treasury yields.
The US midterm elections on November 3 are approaching amid elevated energy prices, inflation concerns and geopolitical tensions. Investors are expecting a Democratic House and Republican Senate, while 31% expect a Democratic sweep. In the latter scenario, 32% expect bond yields to rise and equities to fall, while 22% anticipate a fall in yields and stocks.
Prediction markets have increasingly favoured a Democratic sweep, as election expectations continue to evolve amid macro and geopolitical developments. A Democratic sweep has certainly become more likely given the mess caused by Trump since last year.
Keep in mind, that even a Democratic sweep wouldn’t change much as Trump would retain the power to continue the Iran war or impose tariffs. It could reduce fiscal fears though, supporting long-term bonds and leading to a fall in Treasury yields. The stock market might react positively initially if Treasury yields fall, but going forward, the US-Iran war and deteriorating growth expectations could drag it down to new lows.
This article was written by Giuseppe Dellamotta at investinglive.com.
