Fund managers are putting cash to work. That could be a warning sign, Bank of America says

Bank of America's latest fund manager survey reveals professional investors' cash levels have fallen to a 10-year low of 3.9%, triggering a 'sell signal' as a contrarian indicator of potential market overextension amid the S&P 500's record highs and increased allocations to technology and materials. Despite this, strategist Michael Hartnett is not yet calling a definitive market top, citing non-extreme equity overweights, though 'trade war triggers global recession' remains the primary tail risk.

Analysis

A Bank of America survey of fund managers indicates a potentially overextended market, as professional investor cash levels have declined to 3.9% of assets under management—a low not seen in over a decade. This drop has triggered a contrarian 'sell signal' according to the bank's strategists, suggesting that with less available capital, the capacity for further market upside may be limited. This positioning coincides with a period of record highs for the S&P 500 and is accompanied by a record surge in risk appetite over the past three months, with investor sentiment reportedly at its most bullish since February 2025. Managers have been deploying this cash into technology and materials stocks. However, strategist Michael Hartnett stops short of calling an imminent market top, noting that equity allocations are not yet at extreme levels and bond market volatility remains low. He anticipates investors are more likely to pursue hedging strategies and sector rotation rather than a significant retreat. The primary tail risk cited by managers remains a trade war triggering a global recession, though concern has moderated to 38% from 47% in the prior month's survey.

Key Decisions for Investors

• Given the contrarian 'sell signal' triggered by decade-low cash reserves, investors should consider reducing exposure to the broad market and trimming positions that have experienced significant gains.
• Monitor flows and sentiment in the technology and materials sectors, as they are attracting late-cycle investment but could be vulnerable to profit-taking if market sentiment shifts.
• Investors should consider implementing hedging strategies or rotating into more defensive assets, aligning with the strategist's view that risk management is more likely than a full market exit.
• Keep a close watch on US-China trade rhetoric and tariff developments, as a trade-induced recession remains the most significant tail risk identified by professional investors.