"The famous anti-indicator" is here! Bank of America’s latest institutional survey: Investors are returning to risk assets at a record pace

Global fund managers are pouring into risk assets at a record pace, pushing market sentiment to a multi-month high. However, Bank of America’s renowned analyst Michael Hartnett warns that this survey, which he refers to as a "famous contrarian indicator," may be triggering a clear sell signal.

The survey shows that investor risk appetite has grown at the fastest pace since 2001 over the past three months. In July, the allocation to U.S. stocks saw the largest increase since December, and the allocation to technology stocks recorded the largest three-month increase since 2009. At the same time, the cash level held by fund managers has dropped to 3.9%, falling below the 4.0% threshold, which is considered a "sell signal" according to Bank of America's trading rules.

Behind this wave of optimism is the S&P 500 continuously hitting historical highs, with increased confidence in corporate earnings prospects and the U.S. successfully managing trade disputes. In the survey, the proportion of respondents who believe the economy will not fall into recession in the coming year has completely reversed, with pessimistic expectations nearly disappearing.

Despite the market's optimism, Hartnett has begun to signal risks. As he stated, "Greed is always harder to reverse than fear."

Optimism Rises, Funds Rush In

Bank of America's latest survey paints a picture of funds flowing into risk assets across the board. Conducted from July 3 to 10, the survey covered 175 fund managers managing $434 billion in assets.

The survey results show a significant increase in investor optimism:

• Record Risk Exposure: Measured on a three-month basis, the risk level in investors' portfolios has reached the highest point since 2002.
• Surge in Stock Allocation: The allocation to U.S. stocks recorded the largest increase since December last year; the allocation to Eurozone stocks reached the most "overweight" level in four years; the allocation to technology stocks saw the largest three-month increase since 2009.
• Reversal in Earnings Expectations: Optimism regarding corporate earnings has experienced the largest leap since 2020.
• Decline in Recession Concerns: A net 59% of respondents believe the economy is "unlikely" to enter a recession in the coming year, contrasting sharply with the pessimism observed after April 1.

Shift in Trump Policies and "No Choice" Trading

A key factor driving this surge in risk appetite is the market's interpretation of the policy environment. Hartnett points out that the market is digesting the Trump administration's shift from "detox" to "gorge" policies. With spending cuts, defense, and debt being unfeasible, the only way out is to finance the massive fiscal plan through "a huge beautiful bubble."

Against this backdrop, the trading strategy of "Anything but Bonds" is spreading globally. Hartnett's data shows that the worst-performing asset since the 2020s is U.S. Treasuries (-1%), while gold has performed the best (+114%).

The sluggish bond market and low stock volatility (with the MOVE and VIX indices at low levels) also indicate that market concerns about policy risks are extremely low.

Hartnett's client feedback corroborates this: almost no investors are worried about economic issues, valuations, etc., but everyone is discussing bonds and deficits, actively avoiding long-term bonds.

Risks and Crowded Trades

Despite the buoyant market sentiment, potential risks still exist. Surveys show that fund managers believe the biggest "tail risk" is a global economic recession triggered by tariffs, followed by high inflation hindering the Federal Reserve's rate cuts, and a significant depreciation of the dollar.

At the same time, the level of market crowding is intensifying. The most crowded trades are: shorting the dollar (34%), going long on "Mag7" tech stocks (26%), going long on gold (25%), and going long on European stocks (6%). Hartnett also mentioned that active fund managers are increasingly concerned about performance being concentrated in a few stocks.

The general consensus among traders is that there is still upside potential for the S&P 500 index before the Federal Reserve's Jackson Hole Global Central Bank Conference in August, after which a "healthy correction" may occur.

"Famous Contrarian Indicator" Issues Warning Signals

The Bank of America fund manager survey is known as the market's "famous contrarian indicator," having issued accurate signals at key turning points over the past 12 months. Hartnett specifically pointed out that the fund manager survey has become an "excellent contrarian indicator," marking key turning points over the past year—showing pessimism at market bottoms (such as in August 2024) and optimism at market tops (such as in February 2025).

From this perspective, the bullish sentiment in the July survey may signal the arrival of profit-taking and a summer correction. Bubble indicators include: cash allocation levels below 4.0%, expectations of a soft landing or no landing exceeding 90%, and net stock allocation over 20%. These indicators all align with characteristics of the market approaching "overheating" (toppy) However, Hartnett also added that despite the risk of a pullback, he does not expect a large-scale sell-off this summer, as stock exposure has not yet reached "extreme" levels and the volatility in the bond market remains controlled.

Hartnett advises investors to go all in until the 30-year bond yield breaks the "escape" levels—5.6% in the UK, 5.1% in the US, and 3.2% in Japan. He believes that the long-term bear market for the dollar has just begun and recommends increasing allocations to commodities, cryptocurrencies, international, and emerging markets in the second half of the 2020s.

Risk Warning and Disclaimer

The market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk