Investing.com -- Investor sentiment has taken a sharp negative turn as the era of U.S. exceptionalism appears to be fading, according to Bank of America’s latest global fund manager survey (FMS).
The bank’s latest FMS report shows a record rotation out of U.S. equities, with allocations dropping 40 percentage points from the prior month, leaving investors net 23% underweight U.S. stocks. This marks the lowest allocation since June 2023.
"Stagflation, trade war, end of U.S. exceptionalism drive “bull crash” in FMS sentiment, speed of which consistent with “end of equity correction"," BofA strategists led by Michael Hartnett said in the report.
But while the downturn in U.S. equities and broader risk sentiment is significant, the strategists stress that “no one is long recession/bonds” and investor positioning “is nowhere near extreme bear/close-your-eyes-and-buy levels.”
Meanwhile, cash levels rose sharply as global growth expectations deteriorated, reflecting mounting concerns about economic conditions.
The survey recorded the biggest jump in cash holdings since March 2020, rising from 3.5% to 4.1%. This move effectively ended a BofA “sell signal” that had been in place since December 17.
The shift comes as global growth expectations collapsed to -44% in March from -2% in February, marking the second-largest monthly drop in sentiment in over three decades.
“FMS conviction on global growth historically correlated to S&P 500 price action…pessimism on global growth outlook is bad news for stocks,” the strategists noted.
Stagflation fears remain a dominant theme among investors, with 71% of respondents expecting below-trend growth and above-trend inflation over the next 12 months.
The survey also showed a sharp decline in overall equity exposure, which fell to a net 6% overweight—its biggest monthly drop since July 2022. Bond allocations remain net 13% underweight, indicating that investors have yet to fully rotate into fixed income despite rising cash levels.
Regional allocations underline the extent of the shift. While investors reduced U.S. exposure, they increased their allocations to the eurozone, emerging markets, and the UK.
Fund managers are now net 39% overweight eurozone equities, the highest level since July 2021, while UK stock allocations rose to their highest level since June 2021.
Sector positioning also saw significant changes, with managers increasing exposure to staples, insurance, and telecom while cutting allocations to tech, energy, and consumer discretionary stocks.
The most crowded trade remains long the Magnificent 7, cited by 40% of investors, though this is down from a peak of 71% in July 2024.
Other popular trades include long European stocks (23%) and long crypto (9%).