According to a monthly survey by Bank of America, investors' cash holdings have dropped below a critical threshold, triggering a so-called stock sell signal amid growing concerns over high valuations in tech stocks. BofA strategist Michael Hartnett noted in a report that global fund managers' average cash allocation fell to 3.7%, a scenario that has occurred only 20 times since 2002. Historical data shows that equities declined within one to three months after each such instance, while Treasuries outperformed.
As worries intensify over a potential bubble in artificial intelligence (AI) stocks, the MSCI World Index—up 17% year-to-date—has shown signs of strain. Meanwhile, the S&P 500 has retreated about 3% from its October peak. BofA's survey reveals that investor exposure to equities remains at its highest level since February. Hartnett warned that if the Fed does not cut rates in December, markets face "further adjustment," adding that current positioning is "a headwind, not a tailwind" for risk assets.
The survey also identified a potential AI bubble as the biggest tail risk, with investors for the first time in two decades believing companies are over-investing. About 42% of respondents expect international equities to outperform next year, while only 22% favor U.S. stocks—a view aligning with Goldman Sachs strategist Peter Oppenheimer's forecast. Oppenheimer, who accurately predicted U.S. stocks' underperformance this year, anticipates the S&P 500 will lag global peers over the next decade, with annualized returns of 6.5% (the weakest among regions), versus 10.9% for emerging markets.
U.K. equities are bearing the brunt of investor caution, suffering the largest three-month allocation drop since October 2022 due to concerns over Britain’s economic outlook, potential tax hikes under a Labour government, and interest rates remaining above Eurozone levels.
As tech giants pour billions into AI, markets face mounting pressure. JPMorgan Vice Chairman Daniel Pinto warned of an urgent need to reassess AI valuations, noting any downturn could trigger a chain reaction in equities. Chart analysts also sounded alarms, fearing recent declines may spiral into a broader correction. The S&P 500’s 3.2% drop from its October 28 record marked its steepest retreat since February-April, while breaching its 50-day moving average for the first time in 139 sessions—ending the second-longest streak this century. Goldman trader Lee Coppersmith warned this level could force trend-following quant funds (CTAs) to turn sellers.
Similarly, the Nasdaq Composite broke below its 50-day average, snapping its longest streak above the line since 1995. John Roque of 22V Research highlighted bearish signals, including more stocks hitting 52-week lows than highs—a sign of internal weakness suggesting limited rebound potential.