Equity Exposure Plummets, Cash Holdings Jump As Investors Rethink 'US Exceptionalism,' Bank Of America Survey

Investor confidence is slipping fast, with cash levels surging and U.S. equity exposure crumbling to two-year lows, according to Bank of America's Global Fund Manager Survey.

The shift marks the biggest pullback in risk appetite in years, as fears of economic stagnation and a potential trade war weigh on markets.

Are Investors Losing Faith In The US Market?

The survey, released Tuesday by Bank of America’s chief investment strategist Michael Hartnett, reveals a sharp drop in investor optimism, with stock allocations plunging and cash holdings rising.

The most notable shift in sentiment is the fading belief in “U.S. exceptionalism.” A staggering 69% of fund managers surveyed believe that the theme—centered on the idea that the U.S. economy and stock market can outperform the rest of the world—has peaked.

This has led to a record rotation out of U.S. stocks, with allocation dropping 40 percentage points month-over-month to a net 23% underweight, the lowest since June 2023.

Allocations to global equities have slumped from a net 35% overweight in February to just 6% in March—the lowest level in over four months and one of the largest monthly declines on record.

Instead of moving into bonds, investors have parked their capital in cash, with allocation rising from from 3.5% to 4.1%.

Although the shift has effectively ended the contrarian “sell signal” from Dec. 17, 2024, Hartnett remains cautious, noting that fund managers are not heavily positioned for a recession or a deep bear market.

“No one is long recession/bonds, and FMS positioning is nowhere near extreme bear/close-your-eyes-and-buy levels,” he said.

Last week, the S&P 500, tracked by the SPDR S&P 500 ETF Trust SPY, fell into a correction after dropping more than 10% from its February peak.

Since 1998, the S&P 500 has experienced 11 corrections of at least 10%, with an average decline of 14.3%. Based on current levels, this would imply a potential drop to 5,268.

Macro Pessimism Nears Record Highs

Bank of America’s broadest measure of sentiment, which factors in cash levels, equity allocations and growth expectations, fell from 6.4 in February to 3.8 in March—a seven-month low.

The drop represents the largest single-month decline since March 2020 and the seventh-largest in 24 years. Historically, such sharp sentiment swings have only occurred during major financial crises, including the Great Recession in August 2007 and the European debt crisis in May 2010.

Fund managers are bracing for economic headwinds, with 63% expecting a weaker global economy in the next 12 months.

This marks the second-largest monthly increase in macro pessimism on record, with data stretching back to 1994. The uncertainty surrounding global trade and inflationary pressures has driven investors toward safer assets.

What Are Fund Managers Betting On?

Gold remains the favored hedge against a potential economic downturn. If a full-blown trade war erupts, 58% of surveyed fund managers anticipate gold will be the best-performing asset.

Since the start of the year, the bullion – tracked by the SPDR Gold Trust GLD – has rallied by 14.3%.

The so-called “Magnificent Seven”—referring to tech giants like Microsoft Corp. MSFT, Apple Inc. AAPL, NVIDIA Corp. NVDA, Alphabet Inc. GOOG GOOGL, Amazon Inc. AMZN, Meta Platforms Inc. META and Tesla, Inc. TSLA —remains the most crowded trade, though enthusiasm has waned, with participation falling to its lowest level since November 2023.