The largest potential tail risks for markets were identified as an AI bubble, inflation and a disorderly rise in bond yields.
Global macroeconomic sentiment is at its most bullish since June 2021, with increasing expectations of a global economic boom, according to Bank of America’s latest Global Fund Manager Survey.
Although a period of stagflation is still the consensus opinion (42%), 36% of respondents were positive about the prospects for an economic boom, the highest level since February 2022.
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A record high 52% saw ‘no landing' as the most likely outcome for the global economy, with 40% expecting a ‘soft landing' and just 6% expecting a ‘hard landing'.
The relative exposure to equities compared to bonds is also at the highest level since February 2022, with 48% overweight equities, while 40% were underweight bonds.
Meanwhile, the combined allocation to equities and commodities hit 76% for the first time since January 2022, as managers run their portfolios "hot", said BofA analysts.
The survey also revealed that 49% of respondents were overweight emerging markets equities, and a record 23% were overweight the euro, at a time when investors are reducing their allocation to US equities tech and the US dollar.
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The data led to a rise in the BofA 'Bull & Bear Indicator' to 9.5, triggering a contrarian "sell signal", with the biggest potential tail risks for markets identified as an AI bubble (25%), inflation (20%) and a disorderly rise in bond yields (17%).
The potential impact of a major credit event was also considered, with 43% of respondents suggesting private equity/private credit and 30% pointing to AI hyperscaler capex as the most likely sources.
The number of CIOs telling CEOs to improve balance sheets increased to 35% from 26% in the last survey, as investors noted companies are "overinvesting" at new record highs.
Following the nomination of Kevin Warsh as the next chair of the Federal Reserve, 38% of respondents said that, all else being equal, the "Warsh trade" would likely lead to higher US Treasury yields and a lower US dollar.
