Fund Managers Increase Equity Exposure Amid Record Overvaluation Concerns

Fund Managers Increase Equity Allocation Amid Record Overvaluation Concerns

Global equity markets are experiencing a significant divergence in sentiment, as a recent Bank of America (BofA) monthly Fund Manager Survey reveals that a record number of institutional investors perceive stocks as overvalued, even while increasing their exposure to these assets. This paradox suggests a cautious yet opportunistic approach by fund managers navigating a landscape of improved growth expectations and evolving monetary policy.

The Event in Detail: Valuation Concerns Meet Renewed Optimism

The September 2025 BofA Global Fund Manager Survey, which polled 196 institutional managers overseeing approximately $490 billion in assets, highlights a stark picture: 58% of respondents now see global equities as overvalued, a slight increase from 57% in August. This figure marks a record high for valuation concerns among the surveyed group. In contrast, only 10% believe bond markets are trading above fair value.

Despite these elevated valuation concerns, fund managers have significantly ramped up their equity allocations. The net share of managers who are overweight global equities has doubled since August, reaching a seven-month high of 28% in September. This represents a substantial 14 percentage point increase from the 14% net overweight position recorded in August 2025. Concurrently, cash levels remained low and steady at 3.9% for the third consecutive month, indicating a strong appetite for deploying capital.

Optimism regarding global growth has also seen a marked improvement. The survey recorded the biggest jump in economic growth expectations since October 2024, with only 16% of managers now expecting the global economy to weaken over the next 12 months, a substantial decrease from 41% in August. BofA's composite measure of sentiment, which combines cash balances, equity positioning, and growth expectations, climbed to 5.4 points from 4.5 in August, marking its strongest reading in seven months.

Analysis of Market Reaction: A Nuanced Risk-On Stance

The apparent contradiction of rising equity allocations alongside record overvaluation concerns can be attributed to several factors, including a perceived shift in central bank policy and improving economic outlooks. The Federal Reserve's 0.25 percentage point rate cut on September 17, 2025, the first such move of the year and since December 2024, signals a pivot from aggressive inflation control to economic stabilization. Historically, Fed rate cut cycles have often coincided with positive returns for the S&P 500, which has averaged 14.1% returns in the 12 months following the initiation of a rate cut cycle.

This policy shift, coupled with the improved growth expectations, has fueled a nuanced risk-on sentiment. Fund managers have increased their exposure to specific sectors, including healthcare, telecommunications, and consumer discretionary. A significant portion of this increased allocation has flowed into technology stocks, with a net 20% of fund managers now overweight in the sector—the highest tech allocation since July 2024. This reflects the continued dominance of "crowded trades" such as "Long the Magnificent Seven," which remained the most crowded trade for the second consecutive month.

Conversely, fund managers have trimmed exposure to sectors perceived as less favorable in the current environment, including utilities, energy, and UK and EU equities. While defensive sectors like the Consumer Staples Select Sector SPDR Fund (XLP) and Utilities Select Sector SPDR Fund (XLU) saw initial gains year-to-date, the recent rate cut environment, characterized by a slowing labor market and persistently high inflation, has led to a strategic rotation, moving institutional capital from cyclical assets like banks to defensive sectors such as healthcare.

Broader Context and Implications

The broader market has reflected this renewed, albeit cautious, optimism. The S&P 500 finished at a record high on Monday for the 25th time this year and is now up 12% in 2025. Similarly, Gold (GC00) has also reached a record high, surging 40% this year, indicating a flight to perceived safety or a hedge against inflation.

Despite the bullish sentiment, risks remain front of mind for fund managers. 26% cite a second wave of inflation as the top "tail risk," while 24% fear the Federal Reserve could lose independence, potentially triggering a weaker dollar. These concerns underscore the delicate balance investors are attempting to strike between capitalizing on growth opportunities and mitigating systemic risks.

Looking Ahead

The coming months will be critical in determining whether the current market optimism can be sustained amidst prevailing valuation concerns. Investors will closely watch upcoming economic reports and further actions from central banks. Notably, 47% of fund managers anticipate four or more Federal Reserve rate cuts within the next 12 months, suggesting an expectation of continued accommodative monetary policy. The interplay between corporate earnings, inflation trends, and geopolitical developments will shape market direction, requiring continued vigilance from investors as they navigate a complex and often contradictory market landscape. The current environment suggests a careful allocation strategy, balancing growth potential with an awareness of underlying risks.