Bank of America's August survey has confirmed that fears of an AI bubble are growing on Wall Street, with 32% of fund managers citing it as the biggest risk to markets. This represents a significant shift, as the bubble concerns now exceed current geopolitical turmoil and inflation risk among institutional investors. The survey reveals a paradoxical trend where semiconductor stock bets have fallen sharply from 82% to 53% in just one month, suggesting that smart investors might have already started moving away from AI stocks as bubble talk grows. According to the survey, nearly two-thirds of investors said they need clearer evidence of AI monetisation before adding more exposure to AI-related stocks, indicating a more cautious approach to AI investments. As per The Economic Times, "Tech is still king, but defensives are rising" - a clear shift toward more conservative positioning despite technology remaining the top preference.
The biggest takeaway from BofA's monthly fund manager survey is that bullish sentiment among participants is the third-highest since 2022. The survey, conducted between August 7-13 among 200-plus fund managers managing a combined wealth of $581 billion, reveals that equity allocation is on the rise with cash levels dipping to 3.5% from 3.6% last month and global equity allocation surging to the highest since 2021. Fund managers are now "overweight" on equities for 14 straight months. The average price consensus for oil prices by end of year is $76 per barrel, with 42% believing prices will be between $70-$80, 33% expecting $80-$90, 13% seeing prices down to $70, and 6% anticipating $90-$100 range. However, a small fraction expects prices to either fall below $50 or rise well over $100.
The shift toward defensive positioning has intensified significantly, with 59% of investors now hedging AI downside risk by rotating into value, cyclical and defensive sectors, more than double the level seen in July. According to The Hindu BusinessLine, the top catalyst cited for adding to AI positions was evidence of actual revenue generation from the technology, with nearly two-thirds of respondents requiring clearer evidence of AI monetisation before increasing exposure. The rotation away from cyclicals and technology was most visible in Asia ex-Japan, where investors moved into utilities, banks, consumer staples, healthcare, and telecoms, with Industrials and tech hardware recording the sharpest month-on-month positioning declines. This defensive shift is particularly evident in Asia ex-Japan, where investor optimism toward Asia ex-Japan equities climbed to the 89th percentile historically in August, with investors increasingly viewing the region's equities as undervalued.
50% of fund managers believe there will be no macro landing, 34% expect a soft landing, and 16% anticipate a hard landing for the global economy. The probability of US Federal Reserve rate hikes in September has dwindled down to 32% from well over 70% at the start of the month, with 22% expecting rate hikes and 72% saying no. Long global semiconductors remains the most crowded trade at over 53%, followed by short yen, long Magnificent Seven, long global treasuries, and long EM equities. The survey also reveals that a disorderly rise in bond yields is a new entrant as a major risk, with 27% of fund managers citing it as the biggest risk alongside the AI bubble. Second-wave inflation, geopolitics, and a sweep of Democrats in midterm elections are identified as other significant tail risks.
In Japan, investor positioning remains heavily concentrated in Banks and Semiconductors, with Banks reaching a historical high in survey readings, according to The Hindu BusinessLine. This positioning comes as investors increasingly anticipate a shift in Japanese monetary policy, with nearly 60% expecting the Bank of Japan to deliver its next rate hike as early as September 2026, in line with BofA's economist expectations. Most investors also see USD/JPY at 165 as the likely threshold that would trigger currency intervention by Japanese authorities. The combination of rising optimism toward Asia ex-Japan equities and defensive sector allocation highlights a strategic shift in how investors are positioning within the region, with Taiwan and Japan remaining the most preferred regions for investors, while India has replaced Indonesia as Asia's least-preferred stock market. On the macro front, corporate profit expectations remained well above long-run averages, and concern that consensus earnings estimates were too high fell to the 9th percentile historically.
