Investors still bearish on US economy amid slowdown fears

Stocks are rising, but investors are still bearish on the economy: Bank of America survey

Investors remained bearish about the state of the U.S. economy in early July despite rising bets the Federal Reserve will successfully engineer a soft landing, according to Bank of America's global fund manager survey. 

Sentiment among fund managers remained "stubbornly low" this month, with the majority of investors — roughly 60% — bracing for a weaker economy over the next year. 

About 45% of participants in the survey identified high inflation that keeps central banks on a hawkish trajectory as the top risk to markets. That compares to about 18% who highlighted a potential credit crunch and a global recession as the biggest threat.

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Wall Street in New York

Wall Street in New York City on Jan. 27, 2023. (John Taggart/Bloomberg via Getty Images / Getty Images)

Another 15% are worried about geopolitical situations, like the war in Ukraine or tensions between China and Taiwan, worsening, while just 10% fear a systemic credit event. 

The poll of 262 fund managers was conducted July 6-13 and is based on cash positions, equity allocation and economic growth expectations.

Despite concerns about a weaker economy, a majority of investors see a soft landing as the most likely outcome for global economic growth and expect just a small contraction in earnings. Bets on a "soft landing" jumped to 68% in July, far higher than the 21% predicting a "hard landing" and the 4% calling for "no landing."

NYSE Floor traders

Traders work on the floor of the New York Stock Exchange in New York City on Oct. 31, 2016. (REUTERS/Brendan McDermid / Reuters Photos)

At the same time, respondents are still projecting a mild recession will take hold within the next 12 months. Forty-eight percent expect the start of a global downturn by the end of the first quarter of 2024, while one-quarter anticipate a downturn could begin by the end of 2023.

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There are other signs of optimism within the survey. Expectations on earnings per share are now the least pessimistic since February 2022, the onset of the Russian war in Ukraine. 

"[A] large majority still expect the global profit outlook to worsen (net 50%), but that's the smallest number in almost 18 months," the survey, published by Bank of America Chief Economist Michael Gapen, said.

Bank of America

A Bank of America branch in Manhattan on March 15, 2023. (Spencer Platt/Getty Images / Getty Images)

The fund managers are also anticipating a jump in profits, thanks to the adoption of artificial intelligence. About 42% of investors said AI will increase profits over the next two years.

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Ticker Security Last Change Change %
I:DJI DOW JONES AVERAGES 38834.86 +56.76 +0.15%
I:COMP NASDAQ COMPOSITE INDEX 17862.232077 +5.21 +0.03%
SP500 S&P 500 5487.03 +13.80 +0.25%

The stock market rally that began in the first half of 2023 seems poised to continue in the second half after the Dow Jones Industrial Average touched a fresh high for the year Tuesday. 

As of Wednesday afternoon, the S&P is up more than 19% from the start of the year.