Investors have bought up a ton of stock in the face of considerable risks. This is a common occurrence, but it does create the potential for a market decline.
Investors are highly optimistic right now. “The February 2026 BofA Global Fund Manager Survey suggests global investor sentiment is the most bullish since June 2021,” Bank of America strategists wrote in a research note Tuesday.
According to the survey, asset allocators—people deploying money into funds of various assets for families and institutions—have tilted their customers’ portfolios relatively heavily toward stocks. The net percentage of allocators that say their clients’ holdings are now overweight equities is the highest since late 2024.
At the same time, equity funds’ holdings of cash are unusually low. Cash accounts for 3.4% of the hundreds of billions of dollars overseen by the funds surveyed by the bank. That is near the far low end of the range for cash holdings since at least 1999. It is down from more than 4% at the end of 2024.
The danger there is that stocks are risky and cash is risk-free, offering yields of at least 3.7%. Stocks have achieved spectacular gains in the past couple of years, so money managers are likely to sell some shares and bulk up their holdings of cash if any of the many risks the market now faces becomes more threatening.
Cash at 3.4% is a “sell” signal, given the strategists’ historical data.
All that doesn’t mean that the bull market that has been under way for years is necessarily doomed. Barron’s doesn’t know; our crystal ball is at the factory for its annual cleaning. But bull markets always include “corrections,” or drops of at least 10%, which can turn into larger declines.
Buying up tons of additional exposure to the broader stock market isn’t the best idea because the next significant move could well be downward.
Developments in artificial intelligence could kick off the slide. If the Big Tech software and services companies suddenly slow down their enormous and growing investments in data centers, tons of stocks would take major hits. Prominent among them would be chip companies, which have been selling more semiconductors and related equipment to data-center customers building more infrastructure. Shares of other manufacturers producing gear such as cooling equipment would suffer as well.
Higher bond yields, which would make it more expensive for companies to borrow, could be the factor that brings that slowdown in AI investment. Think about Oracle and its mountain of debt.
Relatedly, bond yields could indeed jump. The 10-year Treasury yield has dropped year to date, partly because the Federal Reserve has reduced short-term interest rates. But the 10-year yield could rise soon, if the Fed’s rate cuts raise expectations for longer-term inflation.
Higher long-term yields would immediately reduce the current discounted value of stocks. They would eventually hit demand for industries such as housing, home-related manufacturing, retail, and automobiles.
Fund managers in the survey named higher inflation and a spike in bond yields as two of the market’s top so-called tail risks, seemingly remote dangers that could nonetheless hammer the stock market. The key word is “seemingly.” While long-term yields are contained for now, inflation could change that, and the market knows it.
The S&P 500 is increasingly at risk of a correction. While Barron’s has recently identified beaten-down areas of the market that look ripe for buying, BofA’s data indicate the market benchmark, with its heavy weighting in technology hardware and all sorts of manufacturers, isn’t a great bet right now.
Be selective with your stock investments.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
