BofA sees first rise in investor sentiment since June

Optimism around the Federal Reserve’s highly anticipated interest-rate cuts has boosted investor sentiment for the first time since June, according to a global survey by Bank of America Corp.

The bank’s measure of sentiment — based on cash levels, equity allocation and growth expectations — rose to 3.9 from 3.6, strategist Michael Hartnett wrote in a note. Fund managers see a 79% chance of a soft landing as rate cuts support the economy.

Still, investors are “nervous bulls,” with risk appetite tumbling to an 11-month low, said Hartnett, who last week reiterated his own preference for bonds. The poll also showed a big rotation into bond-sensitive sectors such as utilities, and away from those that typically benefit from a robust economy. 

Global growth expectations improved slightly from August’s survey, but remained pessimistic with a net 42% of participants predicting a weaker economy.

US stocks have rebounded from a low in August on optimism that the economy can avoid a recession as the Fed prepares to lower interest rates. The central bank is expected to announce a first cut on Wednesday, although trader bets appear to suggest a coin toss between a 25- or 50-basis-point reduction, according to swaps data.

Hartnett said the survey indicated that economy-linked — or so-called cyclical — stocks are likely to benefit from a bigger rate cut on a tactical basis. For now, investors prefer sectors that are considered bond proxies, with exposure to utilities hitting the highest since 2008.

Investors are also the most overweight consumer staples in a year and on banks since February 2023. Tech stocks have the smallest overweight since April 2023, while energy has the most underweight positioning since December 2020.

Other highlights from the survey, which was conducted between Sept. 6 and Sept. 12 and canvassed 206 participants with $593 billion in assets:

• About 52% of investors believe the US economy won’t suffer a recession in the next 18 months
• China growth expectations fall to the lowest since BofA began asking the question three years ago, with a net 18% expecting a weaker economy
• About 90% expect yield curves to steepen, the most on record
• Biggest tail risks: US recession (40%), geopolitical conflict (19%), accelerating inflation (18%), systemic credit event (8%), US election “sweep” (6%) and AI bubble (5%)