For the first time in 20 years, "over-investment" appears! Bank of America fund manager survey: AI bubble has become the largest "tail investment" in the market

Market sentiment is at a delicate crossroads. A Bank of America survey shows that while investor optimism about the economic outlook is warming, concerns about the AI-driven investment frenzy and its potential bubble are also intensifying, alongside a warning signal of excessive corporate investment not seen in 20 years.

According to the news from the Wind Trading Desk, Bank of America's global fund manager survey released on the 18th indicates that fund managers' stock allocation has risen to the highest level since February 2025, but cash holdings have dropped to just 3.7%, triggering the bank's "sell signal." The market is worried that overly bullish positions may become a resistance for risk assets.

However, behind the optimism is a growing risk alert. 45% of respondents view the "AI bubble" as the biggest tail risk in the current market, a significant increase from last month. Meanwhile, "longing the seven giants" has returned to the top of the "most crowded trades" with a 54% vote, highlighting the high concentration of market funds in large tech stocks.

Despite an improvement in macro sentiment this month, with global growth expectations turning positive for the first time this year and 53% of investors predicting a soft landing for the economy, a record 63% of respondents believe that the current stock market valuation is too high. Bank of America warns that behind this shift is a general concern about the scale of capital expenditure in the AI sector and its financing methods. Without new catalysts such as interest rate cuts from the Federal Reserve, risk assets may face downward pressure.

AI Bubble Becomes Top Risk, Warning of Corporate "Overinvestment" Appears for the First Time in 20 Years

The Bank of America survey shows that after months of market frenzy, fund managers' risk assessment of the AI sector is becoming increasingly cautious.

The proportion of respondents who believe the "AI bubble" is the biggest tail risk in the market has jumped from 33% last month to 45%, making it the most concerning risk point currently. Meanwhile, as many as 53% of fund managers believe that AI stocks are already in a bubble. This concern sharply contrasts with the actual trading behavior in the market: "longing the seven giants" has once again become the "most crowded trade" in the eyes of 54% of respondents, replacing last month's "longing gold."

Despite rising bubble concerns, investors still have confidence in the long-term value of AI. 53% of respondents believe that AI "has already" improved productivity, reaching a three-month high. Looking ahead to 2026, 43% of investors view "broad AI productivity enhancement" as the most positive bullish catalyst, while "AI capital expenditure acceleration stagnation" is seen as the second-largest bearish factor by 26% of investors At the same time, the massive capital expenditures triggered by the AI boom have become a new concern for investors. The survey report clearly states that this is the first time since August 2005 that a net 20% of fund managers believe there is "over-investment" in companies. The report attributes this to "concerns about the scale and financing of the AI super-scale capital expenditure boom."

When asked how companies should use cash flow, investors' opinions diverged, but the call for prudent finance cannot be ignored. 33% of respondents want companies to "improve their balance sheets," followed by "return cash to shareholders" (31%) and "increase capital expenditures" (29%).

Optimism and Contrarian Alerts Coexist, Cash Levels Drop to "Sell" Signal

Despite flashing risk signals, the overall sentiment among fund managers remains optimistic, with macro expectations significantly improving.

In the survey, the stock allocation of fund managers rose to a net 34% overweight, the highest since February 2025. The net expectation for global economic growth shifted from negative to positive, reaching 3%, the first time within 2025. Additionally, 53% of respondents predict that the global economy will "soft land" in the next 12 months, far higher than the 6% who believe it will "hard land."

However, at the same time, a key contrarian indicator is sounding the alarm. The average cash level of fund managers dropped from 3.8% to 3.7%. According to Bank of America's "cash rule," when cash levels fall below 4.0%, it triggers a "sell" signal. Historical data shows that in the 20 instances since 2002 when cash levels were at 3.7% or below, stocks subsequently declined over the following 1-3 months. Report strategist Michael Hartnett pointed out that the current positioning is "headwinds rather than tailwinds" for risk assets, and without a rate cut from the Federal Reserve in December, the market's "bubble" may further correct.

When asked about the most likely sources of systemic credit events, 59% of respondents mentioned credit bonds, the highest consensus level since 2022, highlighting investors' concerns about the rapid expansion of the shadow banking system.

Asset Allocation Rotation and Outlook, Reducing Holdings in Technology and Consumer Stocks

In the face of a complex market environment, significant changes in investor allocations were observed in November. In terms of stocks, investors most increased their holdings in healthcare (net 40% increase, the highest since December 2022), emerging market stocks (net 36% increase), and bank stocks (net 36% increase). On the contrary, the allocation of UK stocks has seen the fastest decline since October 2022, with the reduction over the past three months being the largest during this period. The monthly reduction in consumer discretionary allocation is the largest since 2005 (-16 percentage points), currently at a net underweight of 23%, the lowest since December 2022. Investors have also reduced their allocation to technology stocks by the largest amount in eight months within a month.

Looking ahead to 2026, 42% of investors expect international stocks to be the best-performing asset class, while 22% are optimistic about US stocks. At the index level, 37% expect the MSCI Emerging Markets Index to outperform, and 13% favor the Nasdaq. In terms of currencies, 30% expect the yen to perform the best, while 26% are optimistic about gold.

43% of investors believe that broad AI productivity improvements will be the most bullish factor in 2026, while 45% think that inflation and Federal Reserve interest rate hikes will be the most bearish factors, and 26% are concerned about the acceleration of AI capital expenditure stagnation.

In terms of specific targets, 45% expect the yield on 10-year US Treasury bonds to be in the range of 4.0%-4.5% by the end of 2026, 43% expect the S&P 500 Index to be in the range of 7000-7500 points, and 34% expect gold to trade in the range of 4000-4500 USD/ounce