Global fund managers are the most bullish on stocks in nearly two years, a key investor survey indicated Tuesday, as markets look to the second phase of the current market rally amid dovish central-bank signals and a resilient world economy.
Bank of America's Global Fund Managers' survey, showed that nearly 70% of respondents see a so-called soft landing for the global economy, where recession is avoided while inflation slows, as their base case for 2024.
As a result, investors are shifting out of cash and entering the year overweight in global equities, even as the majority of those polled see growth weakening over the next 12 months.
Around two-thirds (66%) of investors in the survey "expect a 'soft landing' for the global economy in the next 12 months, with expectations for a 'hard landing' at 23%," according to the survey polls 254 investors who collective manage around $691 billion in assets. "When asked about the timing of recession for the US economy, 36% said they expect no recession at all in the next 12 months while 32% expect the US to fall into recession in" second-quarter 2024.
Related: Analyst's surprising S&P 500 prediction doesn't depend on Fed rate cut
Recession seen biggest '24 risk factor
In that vein, investors see a hard landing — a global recession — as the biggest risk factor in 2024, just ahead of a surprise uptick in inflation that keeps central-bank interest-rate-policy makers hawkish over the next 12 months.
Markets are pricing in the increasing likelihood of a first-quarter Fed rate cut; CME Group's FedWatch puts the odds at 66.5%. So around 26% of those polled say long Treasury bonds will be the best-performing asset, followed by long-duration tech stocks (such as biotech and renewables) and then banks and small-cap stocks.
Global investors, in fact, are overweight bank stocks for the first time since February 2022 amid the U.S. Federal Reserve's dovish rate pivot. Allocations have risen from a net 10% underweight to a 6% overweight.
At the same time, investors say the most crowded trade heading into next year remains being long the so-called Magnificent Seven big-cap tech stocks: Apple (AAPL) -), Amazon (AMZN) -), Google parent Alphabet (GOOGL) -), Meta Platforms (META) -), Microsoft (MSFT) -), Nvidia (NVDA) -) and Tesla (TSLA) -).
More S&P 500 stocks set to join the rally: LPL
Market breadth has been a key concern for investors for much of the past year. Data show that only around 30% of S&P 500 stocks are currently outperforming the benchmark, the smallest overall total in more than two decades.
Jeffrey Buchbinder, chief equity strategist for LPL Financial, and his colleague, chief technical strategist Adam Turnquist, say that dynamic is set to change.
"The S&P 500 has staged an impressive comeback after briefly entering a correction period this fall. Broad-based buying pressure outside of just the megacap space likely has underpinned the recovery," the pair wrote in a recent report.
"The cyclical or offensive tilt in market leadership and building momentum in this rally provide additional technical evidence for a sustainable bull market in 2024 characterized by broader participation," they added.
With S&P 500 earnings set to rise by 11% next year, firmly ahead of the long-term average of around 8%, and markets pricing in at least four Fed rate cuts, stocks could be looking at a notable extension of the current bull market, which began in late 2022.
"History doesn’t always repeat, but it does rhyme, and solid gains may lie ahead," said Buchbinder and Turnquist. They note that the second year of the past 12 bull markets since 1950 have generated an average gain of around 12.6%, with positive performance each time.
"Low and stable interest rates should help support stock valuations, while corporate profits are moving into a sweet spot," they said. "So even though stocks look fully valued, if rates ease as we expect, we could see upside to our year-end 2024 fair-value target range of 4,850 to 4,950 points."
Vanguard, on the other hand, argues that even with central-bank rate cuts, the so-called neutral interest rate, which neither boosts or stifles growth, is now naturally higher.
That both increases the expectations for higher bond returns while holding down corporate profit margins and stock prices.
"Policy rates are likely to remain at heightened levels compared with periods following the Global Financial Crisis and covid-19 pandemic," Vanguard's chief economist and global head of investment strategy Joe Davis, wrote in a recent report.
He says, however, that that will only increase the value of a 60/40 stock-and-bond portfolio over the longer term.
“This rise in interest rates is the single best economic and financial development in 20 years for long-term investors,” Davis said. “We believe this is a secular trend that will last not just months, but years.”
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