Investors are pulling back from their record pessimism about stocks amid speculation that inflation has peaked, marking a break in the “apocalyptically bearish” sentiment that had been gripping markets, Bank of America Corp.’s monthly fund manager survey showed.
Global growth and profit expectations rebounded from all-time lows hit last month, while 88% of investors participating in the survey now expect lower inflation in the next 12 months, strategists led by Michael Hartnett wrote in a note Tuesday. Investor allocation to stocks also rose from “dire” lows hit in July, according to the global survey, which included 250 participants with $752 billion under management in the week through Aug. 11.
“Sentiment remains bearish, but no longer apocalyptically bearish as hopes rise that inflation and rates shocks end in coming quarters,” Hartnett said.
US stocks have rallied since mid-June after a better-than-expected corporate earnings season and optimism that a slight cooling in US inflation will prompt the Federal Reserve to reduce the pace of its interest-rate hikes in time to avoid a recession.
The technology-heavy Nasdaq 100 is now up 23% since a low in June as rate-sensitive growth stocks led the charge higher. Investors anticipate that trend to hold: For the first time since August 2020, the survey participants expect growth stocks to outperform cheaper or so-called value in the next 12 months, according to Bank of America.
While JPMorgan Chase & Co. strategists -- among the most prominent top-ranked bulls -- said there’s room for growth stocks to extend the rebound, more bearish voices including Morgan Stanley’s Michael Wilson say the gains are just a pause in the bear market and that disappointing earnings are likely to spark another selloff.
Bank of America strategists also said they “remain patient bears.” With their base case calling for rising rates and falling earnings, they would take profits should the S&P 500 climb above 4,328 points -- less than 1% above its latest close, Hartnett wrote.
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The survey showed that investors expect the Fed to change course this year only if the key personal-consumption expenditures price index drops to below 4%, well short of where it is now.
The number of investors expecting a global recession in the next 12 months rose to a net 58%, the highest since May 2020. Exposure to cash fell to 5.7%, but remained well above the long-term average of 4.8%, the data showed.