91% of Fund Managers Deem U.S. Stocks Overvalued Amid Rally

According to the latest monthly survey by Bank of America, a record-high proportion of fund managers now consider U.S. stocks to be overvalued. The survey, conducted from July 31 to August 7, covered 169 institutions managing a total of $413 billion in assets, and revealed that approximately 91% of respondents believe current U.S. stock valuations are too high. This sentiment marks the highest level since 2001, reflecting a significant shift in market sentiment following the substantial rebound in U.S. equities from their April lows.

Despite the optimistic market sentiment, which has improved to its most positive level in six months, the survey indicates that 16% of investors remain underweight in U.S. stocks. This cautious stance is supported by strategists like Michael Hartnett, who notes that expectations of an economic hard landing have decreased to their lowest level since January. The recent surge in U.S. stocks, driven by better-than-expected corporate earnings and optimism surrounding potential interest rate cuts by the Federal Reserve, has led some analysts to raise their forecasts for the S&P 500 index in the second half of the year.

However, strategists warn that the current rally may be overheating, potentially forming a bubble. The survey shows that the cash-to-assets ratio remains at 3.9%, a level typically associated with impending sell-offs in the stock market. This caution is further underscored by the survey's findings on global economic expectations, with 68% of respondents predicting a soft landing for the global economy in the next 12 months, while only 5% anticipate a hard landing. Additionally, 49% of respondents believe that emerging market stocks are undervalued, the highest proportion since February 2024.

Inflation expectations have also risen to a three-month high, with 18% of respondents forecasting an increase in global CPI. The primary tail risks identified by the survey include trade wars leading to global recession (29%), inflation hindering Federal Reserve rate cuts (27%), disorderly bond yield increases (20%), an AI stock bubble (14%), and dollar depreciation (6%). The most crowded trades identified are long positions in the "Magnificent Seven" U.S. stocks (45%), short positions in the U.S. dollar (23%), and long positions in gold (12%).