Fund manager optimism suggests market rally has further to run

Sentiment among professional investors continues to improve, as inflation keeps falling and recession risk dissipates.  

Bank of America’s March global fund manager survey of investors with more than $500 billion (£393 billion) found that optimism was at the most bullish level since January 2022.  

Owning the Magnificent Seven shares - Tesla Inc (NASDAQ:TSLA), Amazon.com Inc (NASDAQ:AMZN), Alphabet Inc Class A (NASDAQ:GOOGL), Meta Platforms Inc Class A (NASDAQ:META), Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT) and NVIDIA Corp (NASDAQ:NVDA) - was the most crowded trade. 

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Part of the recent success of these shares is linked to their role in developing artificial intelligence (AI) technologies, such as language models and cutting-edge computer chips.  

Nearly half (45%) of fund managers concluded that AI-linked shares were not in a bubble and 40% said they were. 

In 2023, the tech-heavy Nasdaq delivered a 43.4% return, with these seven stocks accounting for 67.8% of that return. 

So far in 2024, Nvidia, Microsoft, Meta and Amazon are the leading shares, with some investors calling them the “Fab Four”. 

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Nvidia, whose computer chips are used to power the most advanced AI models, is boosting US and global indices, with the shares up 80% this year. This followed on from a 240% return in 2023.   

While some investors argue that valuations are out of hand, others (such as Terry Smith) say that it is still too early to tell who the winners will be in the AI revolution, if there will be any long-term winners at all. Specialist technology investors are generally all very bullish on the theme and have positioned their portfolios to benefit from it.  

Two out of three investors that Bank of America polled said that a global recession was “unlikely” over the next 12 months. 

After “long” (seeking to profit from rising share prices) the Magnificent Seven, the most crowded were: short (betting against) China equities (14%), long Japan equities (13%), and long bitcoin (10%).  

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Bank of America also found that there was a big jump in interest in emerging market shares and European shares, as well as a rotation into financial stocks at the expense of tech shares and consumer discretionary stocks.  

The average cash level of investors ticked up to 4.4% from 4.2% of assets under management.  

When cash balance rise above 5%, Bank of America says that this is a buy signal for investors (because investors might be too worried) and when cash is below 4% then this is a sell signal (because investors may be too optimistic).