AI fears fail to dent fund manager optimism

Fund managers are the most bullish they have been since February this year, even as concerns about an artificial intelligence (AI) bubble hit a record high.

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Concerns about a global recession are at their lowest since February 2022, with 54% of professional investors polled in the October edition of the widely followed Bank of America Global Fund Manager Survey expecting a soft landing. Those surveyed have their allocation to equities at an eight-month high, with their bond allocation at its lowest point since October 2022. Cash levels are also low at 3.8%.

But this optimism was tempered by concerns about AI valuations, with a record 54% of respondents saying such stocks are in a bubble (versus 38% disagreeing). “Sentiment has flipped from September, when just 41% said stocks were in a bubble versus 48% saying no,” the survey said. Meanwhile, a record net 60% of respondents view global shares as overvalued.

When it comes to the issues troubling fund managers the most, an AI equity bubble cropped up as the biggest “tail risk” in the survey for the first time, with 33% highlighting the possibility, up from just 11% in September. Some 27% of respondents highlighted a second wave of inflation as the biggest risk, while 14% pointed to the prospect of the Federal Reserve losing its independence and the US dollar getting debased.

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However another risk related to US President Donald Trump has receded in investors’ minds, with just 5% of respondents pointing to a trade war as a key risk. In April, a record 80% of fund manager survey investors had identified it as the biggest tail risk, although markets did bounce back strongly after the initial Liberation Day sell-off.

The gold price has continued to skyrocket in recent weeks and this has prompted some concern among the professionals, with 43% of the survey’s respondents highlighting “long gold” as the number one crowded trade. This overtakes “long the Magnificent Seven”, which 39% viewed as the biggest crowded trade.

Contrarian trades for October were to go long on bonds and short on stocks and to back equity sectors such as consumer staples and energy, while going short on banks and industrials.

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In our recent feature, which asked a range of fund managers to name what’s troubling them most about today’s economic and market conditions, several commentators focused on the fact that in the face of pervasive global macroeconomic and geopolitical uncertainty, markets don’t appear to be worrying about anything at all.

Craig Baker, chair of Alliance Witan’s investment committee, argued that there is excessive complacency. He said: “US equities are hitting new record highs almost daily, and volatility (VIX) is at a year-to-date low, despite core inflation trending upwards and likely to be pushed higher by the slow burn impact of tariffs, which, despite numerous deals, are still much higher in aggregate than before President Trump’s inauguration.”

Various stock markets, including the US, UK, and Japan, have recently surpassed or are close to record highs. However, as pointed out in a recent On The Money podcast episode, research from fund firm Schroders shows the US stock market reaches an all-time high more often than investors might think. Schroders looked back at historic data from January 1926, and found in the 1,187 months since then, the market was at an all-time high on 363 occasions, which is  31% of the time.