Low cash levels, declining pessimism toward bonds and bullish earnings forecasts indicate resilient investor sentiment

Bank of America's fund-manager survey polled 161 institutional investors managing almost half a trillion dollars in assets.

Given the S&P 500 's two-month holding pattern and September's bond-market rout, investors might be forgiven for expecting a bearish reading from Bank of America's fund-manager survey for October.

That isn't the case. Cash levels are still below 4%, inflation expectations are the lowest in almost two years, pessimism around bond markets is near the lowest level since spring 2025, a majority of investors expect double-digit earnings-per-share growth in 2027 and there's a belief that the Fed will stand pat this month.

Bank of America's signature report, lead-authored by chief investment strategist Michael Hartnett and compiled with the help of analysts Anya Shelekhin, Myung-Jee Jung and Jessica Guo, is usually published midmonth and offers an insightful snapshot of fund-manager thinking. And the thinking about the appeal of U.S. Treasurys is turning more positive.

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Asked about what U.S. 10-year yield BX:TMUBMUSD10Y would persuade asset allocators to flip from stocks to bonds, 37% pointed to a 6% yield, but 19% aren't waiting and are already shifting. In fact, October has witnessed the biggest bout of fixed-income short covering in the past year. And if inflation expectations are adjusting downward - a net 5% of those polled reckon global CPI growth will be lower 12 months from now - that improved sentiment toward bonds makes perfect sense.

Bond-yield pessimism is the lowest since May 2025.

With cash levels at a relatively low level of 3.9%, it's clear that, while fund managers have been cautious about chasing the S&P 500 SPX beyond its all-time high, they haven't been selling it, either. Those cash levels troughed at 3.5% in August but have since risen gradually.

The determinant of market direction, then, will be whether those investors waiting for 6% yields shift into bonds or give up waiting and decide to commit sooner rather than later. Since three-quarters of respondents expect no move from the Fed on Oct. 28, this decision could be a trigger.

More telling of fund-manager intentions is the chart illustrating how respondents are feeling about the global economy. A net 47% predict above-trend growth and above-trend inflation, even if the latter is moderating, and these "boom expectations," as Hartnett describes them, are the highest since February 2022.

"Boom" expectations are the highest since 2022.

Surveyed on what they felt were the most crowded trades, fund managers selected long positions in semiconductor stocks SOX (45%) and U.S. Treasury shorts TLT (27%), and the biggest tail risk cited was a disorderly spike in bond-market yields that, at 31%, has overtaken the 23% fretting over an AI bubble.

Hartnett always includes in his fund-manager-survey note the contrarian trades that the survey throws up. In this instance, a contrarian trade would be buying bonds, real-estate investment trusts VNQ, and consumer discretionary XLY and staples stocks XLP, paired with bets against emerging markets EEM, tech XLK and stocks overall.

-Jules Rimmer