Global fund managers executed a significant sell-off of US equities in March, according to a Bank of America survey, contributing to the S&P 500’s recent correction. These investors are now net 23% underweight US stocks, marking the lowest allocation since June 2023 and a 40 percentage point drop from February. A majority (over two-thirds) believe the ‘US exceptionalism’ theme has peaked, driving the shift in investment strategy.
BofA strategist Michael Hartnett characterized this reversal as a ‘bull crash,’ noting a surge in cash holdings from 3.5% to 4.1% this month. This rise in cash ended a sell signal triggered in December. Besides the waning US exceptionalism narrative, worries about stagflation and potential trade wars contributed to the market jitters. Seventy-one percent of investors anticipate stagflation—below-trend growth coupled with above-trend inflation—over the next 12 months, the highest such expectation since November 2023. For the first time since August 2021, expectations for higher inflation are also rising.
While the consensus leans towards stagflation, Hartnett points out that fund manager positioning is not yet at extreme bear levels. A net 63% of fund managers expect a weaker global economy in the next 12 months, driven by a deteriorating outlook for the US economy. US economic expectations fell to the lowest since May 2023, while the outlook for China improved. Despite expectations for two or three rate cuts by the Federal Reserve later this year, 55% of investors identify a recessionary trade war as the biggest ‘tail risk,’ the highest conviction since the resurgence of COVID-19 in April 2020.
Despite the shift away from US equities, the ‘long magnificent seven’ trade remains the most crowded, albeit at the lowest level since November 2023. This indicates a continued, albeit reduced, reliance on these tech giants. According to BofA calculations, since 1998, there have been 11 corrections or price declines of more than 10 per cent in the S&P 500, with an average price decline of 14.3 per cent.
