While the October stock market sell-off caused great anxiety among individual investors, many of the world's largest fund managers used it as an opportunity to go bargain hunting, according to the latest release of the monthly Global Fund Manager Survey conducted by Bank of America Merrill Lynch (BofAML). The consensus among survey participants, based on a weighted average of their responses, is that the S&P 500 Index (SPX) will peak at a level of 3,056, or 12.3% above the Nov. 13 close. Also, they believe that the yield on the 10-Year U.S. Treasury Note, which closed at 3.14%, must hit 3.70% before there is a clear signal to rotate from stocks to bonds. Highlights of the report are summarized in the table below.

Fund Managers Are Bullish Short Term

Heavy buyers during October stock market sell-off
Cash levels fell from 5.1% to 4.7%
Forecast roughly 12% upside in S&P 500 to new record
Won't rotate to bonds until 10-Year T-Note yield hits 3.70%

Source: Bank of America Merrill Lynch

Significance for Investors

An overall total of 225 panelists with a combined total of $641 billion in assets under management (AUM) participated in the survey. They have reduced their cash positions on expectations that a global recession is not yet on the horizon, and that a "Big Low" in the stock market is not likely until 2Q 2019 at the earliest. They also are long on the U.S. dollar, expecting it to show continued strength. Only 11% believe that a global recession will begin in 2019.

Respondents indicate that their greatest overweight position as a group is now in health care, with their net overweight allocation to the global technology sector now at its lowest level since Feb. 2009. However, their allocations to the biggest U.S. and Chinese tech stocks, such as the so-called FAANG and BAT groups, still represents their most crowded trade. Also, in what BofAML calls and "ominous" development, the fund managers do not indicate a rotation from tech to value sectors, among which BofAML includes banks, small caps, industrials and EAFE (Europe, Australia and Far East) stocks.

Looking ahead to 2019, the fund managers offered a variety of reasons for pessimism. These are highlighted in the table below.

 Fund Managers Are Cautious About 2019

S&P 500 will lag global stocks
44% expect slower global GDP growth; most bearish since 2008
54% expect slower Chinese GDP growth; most bearish since 2016
Lowest EPS growth rate since 2012 expected
Record high corporate leverage, 46% of GDP, a key worry
Bonds expected to be worst asset class

Source: Bank of America Merrill Lynch

Respondents recorded a net preference for capital expenditures over healthier balance sheets that was its narrowest since December 2009. BofAML notes that indicator historically has been a predictor of the relative performance of stocks and bonds, and now points to further underperformance by equities going forward.

Looking Ahead

The consensus view among respondents calls for the bull market to continue into 2019, but 30% of them believe that the market already has peaked, nearly double the 16% reading registered in the October release of the survey. Given that the consensus is rather optimistic compared to the collapse that others foresee in 2019, investors need to proceed with due caution.