All this year, there has been a large minority of investors who have been skeptical of the rally and the high valuations, and particularly skeptical about the “soft landing.” That is changing. The July Bank of America Fund Manager Survey, a survey of more than 200 global fund managers, indicates 68% expect a “soft landing,” while only 21% expect a “hard landing” — 4% expect “no landing.” That estimate for a “soft landing” has been rising for several months. More notably, only 10% say they are underweight U.S. stocks, down from 44%. Surveys of retail traders also indicate higher levels of bullishness. The latest weekly American Association of Individual Investors sentiment survey shows 41% are bullish, and only 25.9% are bearish. About 33.1% are neutral. The week before, 46% were bullish, the highest in over a year. This is the sixth consecutive week of above-average bullishness — the historic average is 37% bullishness — and a big reversal from early May, when only 24% were bullish. One of the underpinnings of a rising market is high levels of skepticism because it represents people who would come back into the market. But with a lot of investors jumping back in, it makes it harder for the market to advance. The market now has two problems: 1) rising levels of bullishness, and 2) high valuations, with the S & P 500 now trading at roughly 19 times forward earnings, well above the historic average. The “pain trade,” or the trade that would cause the greatest discomfort to the markets, would be a reversal of the soft landing. That high inflation keeps central banks hawkish for far longer. About 45% of investors say that is the biggest tail risk.
