Investor Optimism Hits 2-Year High, Yet Division Over AI, Magnificent 7 Bubble Emerges: Onset Of The Great Rotation?

The latest Bank of America Global Fund Manager Survey (FMS) for March 2024 reveals a significant uplift in optimism among fund managers, with economic growth expectations reaching a two-year high as recession risks fade away.

This optimism has translated into increased allocations to stocks, marking the highest level seen in the same period.

However, the survey also highlighted a significant change in investment strategies, showing a marked shift toward Europe, emerging markets (EM), and financial sectors, moving away from U.S. equities and technology.

Macro Insights: Soft Landing Is the Consensus

The survey underscores a prevailing consensus among two-thirds of respondents that a recession is unlikely within the next 12 months. The majority, 62%, anticipate a “soft” landing for the economy, a significant shift from the 5% who believed in a “no landing” scenario as recently as October 2023.

This shift towards optimism is further supported by the decrease in the expectation of a “hard” landing, now at 11% compared to 30% in the previous October.

With the expectation of a soft economic landing prevailing, investors are showing a readiness to embrace higher levels of risk, indicative of a bullish but not overly exuberant market sentiment.

Additionally, there’s a notable increase in earnings per share (EPS) optimism, reaching a two-year-high, alongside a strong desire among investors for companies to return cash to shareholders, the highest since July 2015.

Also read: Fed Meeting Looms: Why The ‘Dot Plot’ Matters More Than Ever For Financial Markets

The Great Rotation: Shifting From Investment In US Tech

March 2024 saw the most significant monthly rotation into emerging market stocks since April 2017 and into Eurozone stocks since June 2020.

This shift indicates a broad change in investment preferences, moving away from U.S. stocks, technology, and consumer discretionary sectors—the largest cut since May 2015.

The survey also highlights a growing preference for low-dividend stocks, the highest since December 2021, signaling a robust appetite for risk among investors.

AI Stocks: Bubble Or Boom? Magnificent 7 Lead ‘Most Crowded Trade’

A vast majority of respondents, 84%, expect short-term rates to decline in the next 12 months, while 40% foresee lower bond yields. Inflation remains the top tail risk concern.

The survey highlights “Long Magnificent Seven” as the most crowded trade, revealing a split in opinions on AI stocks—45% reject the notion of an AI bubble, whereas 40% affirm it. This division likely stems from the remarkable performance observed in these markets in recent months.

The Roundhill Magnificent Seven ETF MAGS has surged by 20% year-to-date, paralleled by a nearly 40% increase in the Roundhill Generative AI & Technology ETF CHAT since late October 2023.

Additionally, the U.S. dollar is perceived as overvalued by a net 46% of FMS investors, marking the highest level of concern since May 2023.

Sector Views And Contrarian Trades

The survey points to U.S. commercial real estate as the sector most likely to trigger a credit event, according to 42% of FMS investors.

Contrarian trades identified in the survey include long positions in technology for those predicting a bubble, long UK, commodities, and resources for stagflation concerns, and long staples and utilities for a potential hard landing scenario.

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Image created using artificial intelligence with Midjourney.