Despite an increasingly unstable economic backdrop, Wall Street fund managers are once again flooding into equity markets.

Bank of America's latest Global Fund Manager Survey released Tuesday shows that global equity allocations rose to a seven-month high in September, while average cash holdings remained stable at 3.9% for the third consecutive month—a level that typically signals a warning, indicating that investors have little "dry powder" remaining.

However, Bank of America strategist Michael Hartnett noted that market sentiment has not yet reached full-blown euphoria. To achieve a "euphoric" state, cash holdings would need to fall below 3.7% or equity allocations would need to rise above 30%. Currently, only 28% of fund managers hold an "overweight" position on global equities, showing that while investors are bullish, they have not yet reached the historically "blind arrogance" phase that is viewed as a "contrarian sell signal."

Nevertheless, this optimistic sentiment has already permeated the market: the S&P 500 index (^GSPC) closed at a new high on Monday, while the Nasdaq achieved a "six-day winning streak," setting new historical peaks for six consecutive trading days.

Strategists at Wells Fargo, Barclays, Deutsche Bank, and Yardeni Research have all recently raised their S&P 500 forecasts. They cite strong corporate earnings, the artificial intelligence investment cycle, and expected Federal Reserve rate cuts as core factors supporting the next phase of market gains.

Nearly half of the fund managers in the Bank of America survey also expect the Federal Reserve to cut rates at least four times over the next 12 months, which aligns with market expectations—current market pricing suggests the number of future rate cuts could be between five and six times.

However, cracks are already appearing in the equity market rally. "Going long the Magnificent Seven" remains Wall Street's most crowded trading strategy, highlighting that the current rally still heavily depends on a few large technology stocks. Additionally, 77% of fund managers expect a future "stagflation" environment—characterized by weak economic growth alongside persistently high inflation and rising unemployment—a expectation that serves as a reminder that the macroeconomic backdrop remains filled with uncertainty.

This contradiction is reflected in what JPMorgan calls the "jobless growth paradox": despite deteriorating labor market conditions, markets continue to drive stock prices higher due to expectations of Fed rate cuts and easing wage pressures. Piper Sandler points out that this situation is not unprecedented: in the 1950s, 1960s, and early 1990s, unemployment rates rose alongside stock markets because weak employment conditions prompted interest rate cuts, which in turn boosted equity valuations.

For American consumers, their optimism about the economy is increasingly waning.

Recent data shows consumer confidence has declined significantly, particularly among households squeezed by tariffs and rising prices. The University of Michigan's September consumer sentiment survey index fell to its lowest level since May, while long-term inflation expectations climbed for the second consecutive month.

In the latest American Association of Individual Investors (AAII) survey, nearly half of retail investors described themselves as "bearish," marking the most pessimistic survey result since the April tariff shock low. Regarding the job market, cracks are also widening: unemployment among the 16-24 age group has risen to double digits for the first time since the pandemic, while unemployment rates for recent college graduates have exceeded the overall workforce unemployment rate.

Consumer spending remains one of the few bright spots. August retail sales data exceeded expectations, reinforcing the view that "household consumption remains resilient despite tariff pressures."

However, economists warn that the actual impact of tariffs will become more apparent in the second half of this year—price increases in categories such as food, furniture, and automotive parts are already showing signs.

EY Chief Economist Gregory Daco told Yahoo Finance that policy headwinds such as tariffs and immigration restrictions could offset the short-term boost from artificial intelligence investment and Federal Reserve easing policies. He warned: "Current market optimism about the economy is somewhat excessive relative to potential downside risks."