Cash Holdings at a Record Low of 3.3%
Optimism Driven by Earnings Improvement and Rate Cut Expectations
Increasing Allocations to Large-Cap Tech Stocks and Commodities
Global asset management firms have aggressively increased their allocation to equities, driving cash holdings to an all-time low. Despite ongoing debates over the overvaluation of artificial intelligence (AI) stocks, asset managers appear to be maintaining optimism about the stock market, citing improved earnings and expectations for interest rate cuts. However, the historically low level of cash holdings suggests that there is limited capacity for additional buying if stock prices fall, raising concerns that market volatility could increase if negative developments arise.
Cash Holdings Drop to Record Low... Betting on Equities and Commodities
According to a global fund manager survey compiled by Bank of America (BofA) on December 16 (local time), the average cash allocation in portfolios for December stood at 3.3%, the lowest level since the survey began in 1999. This figure is down from 3.7% in the previous month.
As cash allocations declined, asset managers have increased their exposure to equities and commodities. According to the survey, the proportion of fund managers who reported increasing their equity allocation outnumbered those who reduced it by 42 percentage points, marking the highest level since 2022. Even as some argue that technology stocks are already overrepresented in major benchmark indices, the number of fund managers who said they further increased their tech holdings was the highest in over a year.
Elias Galu, BofA investment strategist, noted, "Even at the peak of previous bubble phases, investors were hesitant to reduce cash holdings to this extent," adding, "This means positions have become that much more unstable, and any negative news could have a much larger impact on the market." In other words, with positions excessively tilted toward buying, the market is now structured in a way that even minor negative events could amplify volatility.
The U.S. stock market experienced turbulence in April after President Donald Trump announced sweeping tariffs. However, a rapid rebound followed, driven by strong performance in technology stocks and expectations of interest rate cuts, pushing the market to trade near all-time highs. On December 11, both the S&P 500 and Dow Jones indices hit record highs. Recently, however, the rally has lost momentum amid renewed concerns over the overvaluation of large-cap tech stocks.
Despite these mounting concerns, fund managers' investment sentiment reached its most optimistic level since mid-2021. Bank of America's measure of optimism-which combines cash allocation, equity allocation, and global growth outlook-surpassed levels seen during the so-called 'Trump trade' at the end of 2024. According to the Financial Times (FT), global corporate earnings expectations also reached their highest level since 2021, with these improved earnings prospects serving as a key factor supporting investor sentiment.
The AI Bubble Remains the Biggest Market Risk... Outlook for Higher Long-Term Rates
The biggest risk cited by investors remains the 'AI bubble.' The proportion of respondents identifying it as the top market risk fell from 45% in November to 38% in December, but it still far outpaced other concerns. Kevin Gordon, Head of Macro Strategy at Charles Schwab, warned, "As optimism continues to build, the market is becoming more vulnerable to negative developments. If bad news emerges, the correction could be severe."
The survey also found that a significant number of asset managers expect long-term interest rates to rise further over the next 12 months, with three-quarters of respondents predicting a steeper yield curve. An upward trend in long-term rates signals that interest rates may not fall easily, reflecting market expectations of persistent inflationary pressures and increased fiscal burdens. This could become a structural headwind for the stock market.
Strategist Galu commented, "It is not easy to justify strong optimism about the stock market while also expecting higher bond yields," adding, "The key question going forward is whether the stock market can remain resilient even in an environment where global government bond yields are above 5%."
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