BofA Warns of Overcrowded Bull Market! Equity Allocations Hit Near 5-Year High, AI Bubble Emerges as Top Tail Risk

Global investor confidence in equities continues to rise, but Bank of America strategist Michael Hartnett warns that bullish market positioning has become significantly crowded. Investors should refrain from further increasing equity exposure and instead focus on rotation and defense within risk assets.

Hartnett-led BofA strategists note in their latest report that BofA's August Global Fund Manager Survey shows a net 56% of respondents are currently overweight equities—the highest level since November 2021.

At the same time, cash allocation in portfolios has dropped to 3.5%, reaching an "extremely low" level.

The survey was conducted from August 7 to 13, with 180 fund managers participating, collectively managing $525 billion in assets.

BofA strategists state that the bullish sentiment reflected in this survey is the third-highest since 2022.

BofA points out that the market has formed a highly consistent investment consensus: the economy will not experience a clear "hard landing," the Federal Reserve will not hike rates, AI capital expenditures will not shrink, and Democrats will not achieve a sweeping victory in the U.S. midterm elections.

Under these conditions, Hartnett’s team believes the key question for investors is no longer "whether to hold risk assets," but rather the excessive concentration of market positions.

Therefore, strategists suggest investors are better off rotating or retreating within risk assets rather than further increasing overall exposure. This view aligns with BofA’s recent shift toward more defensive market sectors.

In terms of positioning, "going long global semiconductors" remains the most crowded trade in the market, reflecting the ongoing impact of the AI boom on global capital flows.

However, BofA notes that the crowding in semiconductor long positions has clearly declined compared to earlier levels.

Meanwhile, the AI bubble has emerged as the top perceived tail risk among investors.

Another major concern stems from capital spending by hyperscale cloud providers. The survey indicates investors see this as the factor most likely to trigger a credit event.

Despite the AI bubble being viewed as the largest tail risk, most investors do not yet expect the AI capital expenditure cycle to reverse.

The survey shows that a net 71% of respondents expect no reduction in AI spending this year. Additionally, 58% believe AI will not significantly impact the labor market until at least 2028.