Key Takeaways
A record percentage of fund managers rotated into US equities in May, even as a strong majority anticipate a significant move higher in long-term bond yields, according to Bank of America’s latest global survey. The monthly report reveals a market grappling with a bullish stance on corporate earnings and a deep-seated fear of resurgent inflation.
“The May survey shows a massive rotation into US equities, driven by the powerful combination of a strong earnings season and sustained optimism over AI-related capital spending,” said Michael Hartnett, chief investment strategist at Bank of America. “Yet, the anxiety around a second wave of inflation is clear, creating a sharp divergence between the outlook for stocks and bonds.”
The survey, which polled 200 fund managers with $517 billion in assets under management between May 8 and 14, found a net 50% of participants were overweight US stocks. This represents a 37 percentage point surge from April’s net 13% reading, marking the largest one-month increase in the survey’s history. This rotation into equities saw average cash levels in portfolios decline to 3.9% from 4.3%.
The findings highlight a critical tension in financial markets. While investors are piling into stocks, fueled by just 4% of managers expecting a "hard landing" for the economy, they are simultaneously bracing for pressure on the long end of the interest rate curve. A striking 62% of respondents said that if a major yield fluctuation were to occur in the next 12 months, the 30-year US Treasury yield was more likely to rise above 6% than to fall below 4%. Only 20% held the opposite view. The 30-year yield currently trades around 5.13%.
The primary driver of this bond market bearishness is the growing concern over persistent price pressures. Forty percent of the fund managers surveyed identified “second-wave inflation” as the largest tail risk to markets, making it the most cited concern. This worry is amplified by geopolitical tensions and oil prices that have remained elevated, impacting global bond markets and reinforcing the majority view that long-term rates are heading higher.
Despite these risks, the bullish sentiment for equities is underpinned by a positive economic outlook. A plurality of managers, at 39%, now expect a "no landing" scenario where the economy continues to show resilient growth. This optimism, combined with the belief in the transformative power of artificial intelligence on corporate profits, has been enough to pull capital from the sidelines and push global stock markets toward all-time highs.
This article is for informational purposes only and does not constitute investment advice.
