The Overvaluation Dilemma: US Stocks at a Record 89% Overvalued in BofA Survey – Is It a Cautionary Signal?

The Bank of America (BofA) Global Fund Manager Survey for August 2025 has sounded an alarm: 89% of respondents believe US stocks are overvalued, the highest level of concern since the survey began in 2001. This stark figure, coupled with a net 36% underweight position in US equities and a 31% underweight in the US dollar, signals a seismic shift in global investor sentiment. For contrarian value investors, this is not just a headline—it's a call to reassess risk, diversify allocations, and prepare for a potential correction in a market that has long defied gravity.

The Overvaluation Paradox

The US stock market, particularly the "Magnificent 7" tech giants, has driven a decade-long bull run. Yet the BofA survey reveals a growing disconnect between market performance and fundamentals. While the S&P 500 and Dow Jones hit record highs in August 2025, 54% of fund managers now expect international stocks to outperform US equities over the next five years. This marks a reversal of a 15-year trend where US stocks outperformed global peers in 13 of the past 15 years.

The overvaluation narrative is further amplified by structural factors:
- Crowded trades: 45% of survey participants identified the "Long Magnificent 7" as the most crowded trade, with companies like Nvidia and Microsoft dominating returns.
- Policy uncertainty: Trump's proposed $2.4 trillion tax bill and tariffs have raised concerns about a widening budget deficit and slower economic growth.
- Valuation metrics: While the survey does not quantify price-to-earnings ratios, the behavioral data—89% of managers calling US stocks overvalued—reflects a qualitative consensus.

Contrarian Value Investing: A Path Forward

For investors who thrive in overbought environments, the current landscape offers opportunities to capitalize on market imbalances. Here's how:

1. Rebalance Toward Undervalued Sectors
   The BofA survey notes a rotation into energy, banks, and emerging markets. These sectors, historically underperforming in the tech-driven rally, now trade at attractive valuations. For example, energy stocks, which were underweight in 2024, have gained 12% in 2025 as oil prices stabilize.

2. Diversify Geographically
   With 54% of managers favoring international equities, investors should consider allocations to the MSCI World ex USA Index, which has outperformed the S&P 500 by 8.2% in 2025. Emerging markets, though volatile, offer growth potential in economies like India and Southeast Asia.

3. Hedge Against a "Sell America" Trade
   The survey highlights a net 31% underweight in the US dollar—the most negative reading in 20 years. Currency hedging strategies, such as shorting the USD or investing in dollar-weak sectors (e.g., commodities), can mitigate risks if the "Sell America" trade gains momentum.

Risk Mitigation in a Volatile Environment

The BofA survey also underscores a critical shift in risk perception:
- Crowded trades: The "Magnificent 7" have driven 60% of the S&P 500's returns in 2025. A selloff in these stocks could trigger a broader market pullback.
- Economic tail risks: While 5% of managers still fear a hard landing, the post-election optimism has pushed expectations of stronger US growth to 28%. This duality—bullish sentiment vs. fiscal policy skepticism—demands a cautious approach.

Investors should consider:
- Sector rotation: Reduce exposure to overvalued tech stocks and increase holdings in defensive sectors like utilities and healthcare.
- Options strategies: Use put options on the S&P 500 or Russell 2000 to hedge against a potential correction.
- Cash reserves: Despite a 15-year low in cash holdings (3.9%), maintaining a 10–15% cash buffer can provide liquidity for opportunistic buys.

The Road Ahead: Balancing Optimism and Caution

The post-election surge in US stocks—led by the Russell 2000's 6% gain—has reignited bullish sentiment. However, the BofA survey's 89% overvaluation reading serves as a cautionary signal. History shows that markets often peak when sentiment becomes "toppy," as BofA's Michael Hartnett notes.

For contrarian investors, the key is to capitalize on overvaluation without abandoning the market entirely. This means:
- Avoiding a "buy the dip" mentality in crowded sectors.
- Focusing on value-driven opportunities in undervalued regions and sectors.
- Preparing for volatility through hedging and diversification.

Conclusion

The BofA survey's record-high overvaluation reading for US stocks is not a death knell for the market but a reminder of the cyclical nature of investor behavior. For those willing to adopt a contrarian mindset, the current environment offers a unique opportunity to rebalance portfolios, hedge risks, and position for a more balanced global market. As the "Sell America" trade gains traction and international equities gain favor, the path forward lies in disciplined value investing and strategic risk mitigation.

In the words of Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful.” The question now is whether investors will heed the warning signs—or ride the euphoria until the music stops.