Global asset managers are experiencing unprecedented levels of cash holdings, which have plummeted to a record low, signaling a strong investor confidence amid an AI-driven stock market surge. According to a recent survey conducted by Bank of America, average cash allocations in portfolios fell to 3.3 percent in December, down from 3.7 percent in November. This marks the lowest level recorded since the survey’s inception in 1999.
Investors have increasingly turned to equities and commodities, with 42 percent of fund managers reporting they are overweight in stocks—an indication of optimism not seen since 2022. The allocation towards technology stocks has also reached its highest point in over a year, despite major indices already being significantly skewed toward this sector.
Elyas Galou, investment strategist at Bank of America, noted the fragile nature of this positioning. He remarked that even during previous market peaks, investors did not maintain such low levels of cash allocation; thus, any negative developments could lead to pronounced market impacts.
The resilience of U.S. stocks, which have remained close to record highs after rebounding from an April downturn driven by geopolitical tensions, has been fueled largely by the tech sector’s explosive growth and the anticipation of lower interest rates. However, there has been growing anxiety among investors regarding the high valuations of large technology firms. Despite these concerns, the survey indicates that fund managers are displaying the greatest bullish sentiment since mid-2021, a sentiment reinforced by an analysis of cash levels, equity distributions, and global growth expectations.
Emmanuel Cau, head of European equities strategy at Barclays, commented on the optimistic outlook for investors as they position themselves for the future, noting that the threshold for positive surprises in the market has risen.
The Bank of America optimism metric now surpasses levels observed during the “Trump trade” peak at the end of 2024, when investors surged into U.S. equities and the dollar, anticipating beneficial outcomes from a pro-market administration. Furthermore, expectations regarding global corporate profits are at their highest since 2021, indicating strong earnings growth as a pivotal factor in bolstering investor confidence.
Arun Sai, a senior multi-asset strategist at Pictet Asset Management, emphasized the bullishness in the market, suggesting that after a period of policy uncertainties and fears of stagflation, investors are now looking towards more favorable conditions.
While concerns about an “AI bubble” persist, the percentage of investors citing it as their primary risk has declined from 45 percent in November to 38 percent in December. Kevin Gordon, head of macro at Charles Schwab, expressed that the continued optimism reflected in low cash levels among fund managers could make the market susceptible to more severe corrections in light of adverse news.
The survey also revealed that an increasing number of investors anticipate higher long-term interest rates within the next year, with three-quarters of managers predicting a steepening yield curve during that period. Galou highlighted the complexities in reconciling the current bullish sentiment in equities with expectations for rising bond yields, posing the critical question of whether global equities can sustain their gains if bond yields exceed 5 percent.
