Investor sentiment has surged to its strongest level in nearly four years, according to Bank of America’s December Global Fund Manager Survey. The findings reveal a market increasingly confident in a "soft landing" scenario for the U.S. economy, with cash allocations dropping to record lows and equity exposure climbing to multi-year highs.
A Bullish Turn in Sentiment
Bank of America strategist Michael Hartnett described the survey as "the most bullish in the past three and a half years." Macroeconomic optimism is now at its highest since August 2021, driven by expectations that policymakers will allow the economy to "run-it-hot."
The survey shows equity and commodity allocations rising to their highest levels since February 2022, while cash positions fell to just 3.3%, down from 3.7% previously. This decline in cash holdings reflects investors’ willingness to embrace risk assets amid improving growth expectations.
Bull & Bear Indicator Nears Sell Signal
Hartnett cautioned that the survey pushed Bank of America’s Bull & Bear Indicator to 7.9, a level "very close to a sell signal." He warned that crowded long positions remain the biggest headwind for risk assets, suggesting that while optimism is high, positioning could amplify volatility if sentiment shifts.
Profit Expectations Drive Confidence
Profit expectations are a major driver of the bullish outlook. Bank of America noted that expectations are at their highest since August 2021. According to the survey:
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57% of respondents expect a soft landing.
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37% expect a "no-landing" scenario, where growth remains resilient without a slowdown.
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Only 3% foresee a hard landing, the lowest reading on record.
This distribution highlights a broad consensus that the economy will avoid recession, even as inflation remains above target.
Liquidity Conditions and Policy Outlook
On the policy front, liquidity conditions are rated as the third best in the past 17 years, reflecting supportive monetary and fiscal dynamics. However, most investors still expect bond yields to rise, continuing a trend seen since April 2022.
The survey also revealed that 69% of investors expect Kevin Hassett to become the next Federal Reserve chairman, underscoring the political dimension of monetary policy expectations heading into 2026.
Risks: Crowded Trades and AI Bubble
Despite optimism, risks are mounting. Bank of America highlighted the danger of crowded trades, with long positions in the "Big Seven" tech stocks (54%) and gold (29%) dominating portfolios.
The survey identified an "artificial intelligence bubble" (37%) as the biggest tail risk, reflecting concerns that valuations in AI-related stocks may have run too far, too fast. Other potential risks include private lending and hyperscaler capital expenditures, which could trigger credit events if conditions tighten.
Asset Allocation Trends
From an allocation perspective, investors are:
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Most overweight equities since December 2024.
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Most underweight bonds since October 2022.
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Most overweight commodities since September 2022.
This positioning reflects confidence in growth and inflation resilience, but also leaves portfolios vulnerable to shocks if optimism proves misplaced.
Soft Landing Consensus
The widespread expectation of a soft landing is central to current sentiment. Investors believe policymakers will balance inflation control with growth support, avoiding the sharp downturns that typically follow aggressive tightening cycles.
Yet Hartnett’s warning about the Bull & Bear Indicator suggests caution. Historically, extreme bullish readings have preceded market pullbacks, as crowded positioning leaves little room for upside surprises.
Implications for 2026
Looking ahead, the survey implies that investors expect continued strength in equities and commodities, supported by resilient profits and favorable liquidity. However, risks tied to crowded trades, rising bond yields, and potential bubbles in AI-related assets could challenge the consensus.
For policymakers, the survey underscores the importance of managing expectations. If inflation proves sticky or growth falters, the soft landing narrative could unravel quickly, forcing a reassessment of risk assets.
Conclusion: Optimism With Caveats
Bank of America’s December survey paints a picture of investors at their most optimistic in years, betting heavily on a soft landing and reduced inflation risks. Equity and commodity allocations are surging, cash is at record lows, and profit expectations are robust.
But with the Bull & Bear Indicator flashing near-sell levels and crowded trades dominating portfolios, the market may be vulnerable to sudden shifts. For investors, the message is clear: optimism is high, but caution remains warranted.