Wall Street investors’ optimistic outlook has reached its highest level in about three years as of June 18.
Amid the optimistic stock market outlook, cash holdings have dropped to their lowest level in three years.
This was revealed in the Bank of America (BofA) Securities’ Fund Manager Survey (FMS) results released on the same day.
FMS is one of the key indicators reflecting Wall Street’s investment sentiment.
However, such optimism is raising concerns that it may be a warning signal indicating a bubble in the stock market.
The Highest in Three Years
According to CNBC, BofA investment strategist Michael Hartnett said in an analysis note on the same day, “The June FMS sentiment is showing the highest level of optimism since November 2021.”
Hartnett stated, “Based on cash levels, stock allocations, and economic growth expectations, the FMS index jumped from 5.99 last month to 6.03 this month.”
The New York Stock Exchange is showing a steep upward trend.
On May 17, the Dow Jones Industrial Average broke the 40,000 mark for the first time in history, and the tech-heavy Nasdaq index has set new all-time highs on seven trading days so far this month.
Excluding June 5, it broke the record high for six consecutive trading days from June 10 to 17.
The S&P 500, which broadly reflects market conditions, also set new record highs on four trading days from June 10 to 13, following June 5. After declining on June 14, the S&P 500 embarked on another record-breaking march this week, setting record highs on June 17 and 18.
The FMS revealed that Wall Street fund managers not only dismissed expectations of an economic slowdown but are also betting on a rise in stock prices centered on the Magnificent(M) 7 stocks, which refer to seven large tech stocks.
Growing Concerns
Ironically, concerns about such excessive optimism are also increasing.
Recent cases have shown that excessive optimism can negatively impact the stock market.
When the FMS peaked in November 2021, the S&P 500 showed a strong upward trend, soaring 26%.
However, the S&P 500 plummeted more than 19% in 2022.
This time, there’s a difference.
The 2022 crash was due to the U.S. Federal Reserve (Fed)’s interest rate hike.
The stock market plummeted as the Fed raised interest rates to the highest level in 23 years, from 0-0.25% to 5.25-5.5%.
The Fed has hinted at at least one rate cut this year with expectations of more than four cuts next year.
However, many experts are pessimistic that the stock market trend in the second half of this year will be unstable.
The analysis is that the steep rise in the stock market in the first half of this year could become a burden as it overlaps with the summer vacation season.
In the survey, inflation was still identified as the biggest risk factor, but the proportion of fund managers who considered it the number one risk factor fell significantly from 41% in May to 32%.
The forecast that the U.S. economy will have a soft landing also overwhelmed the proportion of fund managers expecting a soft landing at 64% to 5%.
