• BofA's Bull & Bear Indicator hits 8.9, triggering a contrarian sell signal, but cash rose slightly to 4.1%.
  • Fund managers trimmed equity and tech exposure while adding Japan and banks; Europe remains underweight.
  • Inflation and AI bubble risks top concerns; bonds, Europe and consumer stocks seen as contrarian plays.

Sentiment Nears Extremes, but Not a Top

Bank of America's latest Fund Manager Survey shows investor sentiment is near peak levels but has not yet reached a major market top, according to the bank's strategists. The closely watched Bull & Bear Indicator rose to 8.9, a level that historically signals a contrarian sell. However, cash allocations inched up to 4.1%, suggesting some caution rather than outright exuberance.

"The indicator is flashing a warning, but we're not calling a 'big top' just yet," one strategist said, speaking anonymously. The shift comes as fund managers modestly reduced their equity and tech exposure, rotated into Japanese stocks and banks, and remained underweight on Europe.

AI Bubble Fears Loom

Inflation driven by AI infrastructure costs and the risk of an AI bubble dominate investor concerns, the survey found. "The market is pricing in a lot of AI optimism, but if capex doesn't deliver productivity gains, we could see a repricing," a fund manager noted. Meanwhile, bonds, European equities and consumer stocks are increasingly viewed as contrarian opportunities, according to the survey.

Sector Rotation Underway

In terms of positioning, the survey shows a pivot away from crowded tech trades. Allocations to technology stocks fell, while banks and Japanese equities saw inflows. Europe remained a notable underweight, reflecting ongoing worries about growth and political risks.

Bank of America's strategists said the current reading does not necessarily portend an imminent downturn, but they advise monitoring breadth and volatility closely. A correction in risk assets could occur if sentiment shifts further or if AI-related costs push inflation higher, they cautioned.

Correction: An earlier version of this article misstated the cash level. It is 4.1%, not 4.2%.