Institutional investors turn bearish on U.S. stocks in historic shift

A recent Bank of America Global Fund Manager Survey indicates a sharp decline in institutional sentiment towards U.S. equities, with a net 38% of fund managers underweight in early May 2025, the lowest allocation since May 2023. This shift represents the sharpest decline in overweight U.S. stocks in five months, with fund managers significantly increasing exposure to Eurozone equities, reaching the highest divergence since October 2017. This realignment in global equity preferences coincides with easing trade tensions and a Moody's downgrade of the U.S. credit rating, signaling concern over U.S. valuations and macroeconomic uncertainty.

Analysis

Institutional sentiment towards United States equities has experienced a historically sharp downturn, with a net 38% of fund managers reporting an underweight position in early May 2025, the lowest allocation since May 2023 and, barring that period, the weakest since prior to the 2008 financial crisis, according to the Bank of America Global Fund Manager Survey. This represents a dramatic reversal, as the net percentage of managers overweight U.S. stocks plummeted by approximately 70 percentage points over the preceding five months, the most rapid decline on record. Concurrently, there has been a significant rotation into Eurozone equities, with the net overweight in Eurozone versus U.S. equities reaching nearly 75%, the widest divergence since October 2017 and a stark contrast to the -62% reading just four months earlier. This substantial reallocation suggests deep-seated concerns among professional investors regarding U.S. equity valuations and macroeconomic uncertainty, despite easing U.S.-China trade tensions and declining recession probabilities, as noted by institutions like JPMorgan. Further complicating the U.S. outlook, Moody's downgraded the U.S. credit rating on May 16 due to persistent fiscal deficits, resulting in all three major credit rating agencies now rating U.S. sovereign debt below their highest tier for the first time in history, potentially exacerbating concerns over U.S. asset attractiveness.

Key Decisions for Investors

• Investors should critically reassess their U.S. equity allocations in light of the significant institutional underweighting and sharp negative sentiment shift, potentially considering a reduction in exposure.
• Explore opportunities to increase exposure to Eurozone equities, aligning with the strong institutional fund flows and the historically high overweight positioning relative to the U.S.
• Closely monitor developments in U.S. fiscal policy and sovereign debt markets, particularly following the Moody's downgrade, as these factors could further impact U.S. equity valuations and overall market stability.