Bank of America has cautioned that professional fund managers may be overly confident in the sustainability of the current stock market rally. The bank's monthly fund manager survey reveals that professional investors are pouring more and more cash into the market, a sign that could serve as a contrarian indicator, foreshadowing future trouble, according to Michael Hartnett, the bank's investment strategist, in a note to clients.

Low Cash Levels: A Potential Sell Signal

Some Wall Street observers believe that when cash levels are excessively low, the available "ammunition" for investing in stocks decreases, leading to potentially fewer buy orders in the future. The report stated that "investor optimism on corporate profits is up the most in the past three months since July 2020, risk aversion has soared to a record high, current sentiment is the most optimistic since February 2025; cash holdings have fallen to 3.9%, triggering a 'sell signal'." Bank of America pointed out that the 3.9% cash level is the lowest in over a decade, measured as a percentage of assets under management. While fund managers are reducing their cash reserves, they are increasing their holdings in technology and materials stocks.

S&P 500 Records Record Highs

This cash reduction coincides with the S&P 500 (SPX) recording successive record highs since the end of June. However, Hartnett has not yet determined whether the stock market has peaked, at least not yet. The report stated: "Since the overweight on stocks has not reached extreme levels, and bond volatility remains low, and greed is harder to reverse than fear, investors are more likely to choose hedging and rotation in the summer rather than heavily shorting or retreating."

Trade War Risks

The survey also revealed that the ambiguous trade situation between the United States and most of its major trading partners could be the spark that prompts fund managers to increase their cash holdings. The report stated that the "biggest 'tail risk' is a 'trade war leading to global recession,' a view held by 38% of respondents." However, this percentage is lower than the 47% in June (when 47% of fund managers ranked the trade situation as the biggest risk).

Dominance of Tech Stocks

Most of the gains in the U.S. stock market in recent years have been driven by technology stocks, which were at the forefront of sell-offs in April. The recovery of tech stocks is the latest sign that investors are not heeding Trump's recent threats of tariffs, betting that the so-called "Magnificent Seven" will be able to continue enjoying rapid profit growth. "Big Tech has reasserted its dominance," said Venu Krishna, head of U.S. equity strategy at Barclays. The tech-focused Nasdaq has risen more than 33% from its April lows, posting a series of record highs. Chipmaker Nvidia (NVDA) last week became the first company to reach a valuation of $4 trillion. In the Bank of America survey, the net percentage of fund managers now overweight on technology stocks is 14%, up from a net -1% last month. Despite the recovery, enthusiasm for the sector in long-term surveys remains below average.

Concerns about Technology Valuations

"Valuations are the number one concern for the technology sector," said Elyas Galou, investment strategist at Bank of America. He added that fund managers "realize they are buying one of the most expensive markets in the last 100 years."

Cautious about U.S. Assets

The survey also showed that fund managers remain cautious about broader U.S. assets, with dollar short positions seen as the most crowded trade in the market. The dollar index is down nearly 10% year-to-date. In the three months leading up to July of this year, "long gold" was consistently seen as the most crowded trade by fund managers. "Investors are bearish on the U.S. sentimentally, but they are not actually bearish," Galou said. "They are bullish on tech stocks because of artificial intelligence, but they are bearish on the dollar because of U.S. trade and fiscal policies."

The Rise of the Euro

Tensions surrounding the dollar have once again boosted the popularity of the euro. In the survey, a net 20% of fund managers were overweight on the euro, the largest percentage since January 2005. A net 41% of investors also said they were increasing their holdings in European stocks, compared with a net 1% in January. The survey was conducted from July 3 to 10 and included 211 participants managing $504 billion in assets.