Global investors are pushing into higher risk strategies as rate cut expectations and forecasts for a less severe economic downturn raised the appetite for higher equity allocations in their portfolios.
Despite signs of slowing economic growth in recent weeks, only a net 26% of investors polled in Bank of America's monthly Fund Manager's Survey thought profits would worsen in the next 12 months — the most optimistic profit outlook since February 2022.
This drove an increase in equity allocation, up 13 percentage points to 15% overweight — the highest portfolio allocation of equities in since February 2022. The $SPDR S&P 500 ETF (SPY.US)$, an exchange traded fund that has tracked the senior U.S. equity index, gained 24% in 2023.
Goldilocks Favors Stocks But Bearish On Commodities
The so-called Goldilocks scenario for the economy references the traditional children's tale and represents growth that is neither too hot to encourage inflation and rate hikes, nor too cold to provoke recession.
BofA investment strategist Michael Hartnett said: "Sentiment on 'Goldilocks '24' is the most upbeat since January 2022, with an increase in equity overweights, and most bearish on commodities — relative to bonds — since March 2009."
However, investors said some equity trades were now looking overcrowded — particularly long positions on the Magnificent Seven stocks, which include $Apple (AAPL.US)$, $Microsoft (MSFT.US)$ and $NVIDIA (NVDA.US)$ — the last of which is the year's best-performing stock on the S&P 500 this year, with a massive 236% gain.
Rate Cuts Will Favor Bonds
On policy, fund managers were overwhelmingly optimistic the Federal Reserve's cycle of rate hikes was over, with 89% expecting lower rates in the first few months of 2024.
A net 50% of investors polled in the survey said they expected weaker economic growth over the next 12 months, but more than 70% predicted a soft landing.
