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.
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."
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.
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.
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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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.