Optimism in global equity markets has reached extraordinary levels. Institutional investors are shifting nearly all available capital into risk assets, while their cash reserves have fallen to a level at which Bank of America triggers a contrarian sell signal.
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Low Reserves Increase Stock Market Sensitivity
The July Global Fund Manager Survey showed that the share of cash in fund managers’ portfolios fell from 4.1% in June to just 3.6%. Bank of America considers a value of 4% or less as a signal that investors may be too optimistic. The survey included 181 respondents managing assets worth approximately $484 billion.
A low volume of cash does not automatically mean a sharp decline must occur. However, it shows that most capital has already been invested and there is less free money left in the market for further purchases. Any negative news, weaker corporate results, or deterioration in economic outlook can therefore trigger a stronger reaction than in a normal environment.
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AI Remains the Main Driver of Optimism and Source of Risk
Investor sentiment is supported by the conviction that the global economy will manage to continue growing without a deeper recession. The Bull & Bear Indicator from Bank of America climbed to 9.4 points out of ten, and most fund managers expect a favorable economic scenario. At the same time, positions in U.S. stocks have significantly strengthened, and a record 82% of respondents identified the semiconductor sector as the most crowded trade in the market.
The risk primarily lies in high valuations and record capital expenditures by technology companies on data centers, chips, and infrastructure for artificial intelligence. Investors are increasingly monitoring whether these costs will translate into corresponding profits and cash flows. Bank of America’s signal therefore does not predict an immediate market crash, but it warns that the margin for error is narrowing and even a minor disappointment could trigger a more significant correction.
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