Equity allocations surge as investors bet on earnings and lower rates

Global fund managers raised their allocation to equities by the largest amount on record in May, supported by optimism surrounding corporate earnings growth and expectations that the Federal Reserve could begin cutting interest rates, according to Bank of America’s monthly survey released on Tuesday.

The survey showed that investor sentiment toward equities improved significantly even as oil prices remained above $100 per barrel and global bond markets faced pressure from stalled peace negotiations between the United States and Iran.

Bank of America surveyed between May 8 and May 14, polling 200 respondents who collectively manage $517 billion in assets.

Equity allocations jump sharply

According to the survey, a net 50% of fund managers said they were overweight equities in May, a sharp increase from 13% in the previous month.

The data marked the biggest monthly rise in equity allocations recorded by the survey.

The increase in stock exposure comes as global equity markets continue trading close to record highs.

Investors were encouraged by a strong corporate earnings season and continued optimism surrounding heavy spending by companies on artificial intelligence.

At the same time, average cash allocations among fund managers fell to 3.9% from 4.3% a month earlier, indicating investors were deploying more capital into markets instead of holding defensive cash positions.

The survey suggested that many investors remain confident that economic conditions will stay resilient despite concerns over inflation and geopolitical tensions.

Investors dismiss hard landing concerns

Only 4% of respondents said they expected a hard landing, a scenario in which economic growth and job creation contract sharply.

In contrast, 39% of surveyed fund managers said they anticipated no landing at all, reflecting confidence that economic activity would remain stable without a significant slowdown.

The findings indicate that investors continue to believe the global economy can withstand current market pressures, including elevated energy prices and uncertainty surrounding Middle East tensions.

Oil prices have remained above $100 a barrel, while negotiations between the United States and Iran remain at a stalemate.

The ongoing tensions have weighed heavily on global bond markets in recent weeks.

Despite those concerns, investor appetite for equities remained strong during the survey period.

Inflation risks remain a key concern

Although investors turned more optimistic on equities, inflation concerns continued to dominate market risks identified by respondents.

Around 40% of surveyed fund managers said a second wave of inflation represented the biggest tail risk facing markets currently.

The survey also highlighted expectations for higher long-term Treasury yields.

A majority of respondents appeared to believe yields would remain elevated over the coming months.

According to the findings, 62% of respondents said they were targeting a 6% yield on 30-year US Treasury bonds.

The yield currently stands around 5.14%.

Meanwhile, 20% of respondents said they expected the 30-year Treasury yield to move toward 4%.

The survey further showed that 66% of respondents expected the Strait of Hormuz bottleneck to end within the next few months, suggesting many investors believe geopolitical pressures impacting oil markets could eventually ease.