Bank of America: Fund Managers Do Not See a Stock Market Bubble Forming

Even as the stock market has continued to test new highs, a growing number of voices have begun to warn about the dangers of irrational exuberance leading to an unsustainable bubble. However, based on the latest Bank of America (NYSE:BAC) Global Fund Manager Survey published on Feb. 16, it appears that few asset managers are worried.

No bubbles in sight

Among the 225 survey respondents – which included managers of hedge funds, mutual funds and pension funds – there was near universal agreement for strong economic growth, with the consensus view calling for a "V-shaped" recovery. As a result, fund managers are no longer prioritizing balance sheet strengthening and cash conservation, instead calling on companies to return to growth spending. Michael Hartnett, Bank of America's chief investment strategist, summed up the overall sentiment among fund managers succinctly:

• Warning! GuruFocus has detected 9 Warning Signs with BAC. Click here to check it out.
• BAC 30-Year Financial Data
• The intrinsic value of BAC
• Peter Lynch Chart of BAC

"The only reason to be bearish is...there is no reason to be bearish."

Fund managers have clearly returned to a "risk on" posture, as evidenced by their dwindling allocations to cash, which, at an average of 3.8%, are at their lowest level since 2013. Despite most stock indexes floating well above historical earnings multiples, only 13% of fund managers were willing to call it a bubble. With their elevated "preference for cyclical stocks, high exposure to commodities, emerging markets, industrials and banks," it is evident that fund managers expect the current capital market ebullience to continue for the foreseeable future.

Tech sector looks frothy

While fund managers generally see no indications of a bubble in the stock market overall, that view may not hold for certain segments of the market. However, as Robeco's Jeroen Blokland pointed out on Feb. 16, such cases have been largely isolated to the tech sector, though even then it may not be indicative of a sector-level bubble:

"While there are clear signs of irrational exuberance, these are found mainly in a number of specific market segments. Technology, small caps, IPOs, and the combination of the three are the best examples. Big tech is by no means cheap but has massive earnings numbers and growth to back it up."

I can see Blokland's point with regard to tech stocks, but healthy earnings and strong growth cannot guarantee a robust stock price, especially when valuations rise to such frothy levels as we see today. As hedge fund manager Ben Mackovak observed in December, "Even the best companies with great products can drop -80% when a bubble deflates." A lesson many investors learned the hard way when the dot-com bubble burst.

My verdict

Despite the brightening sentiment among fund managers, I find it difficult to ignore the growing number of market indicators flashing red. If anything, asset managers' increasingly cavalier attitude toward risk should be seen as a warning sign in my assessment.

My recommendation is to remain cautious and avoid overextension. The bull market could very well carry on for quite some time, but the dangers are multiplying.

Disclosure: No position.

Read more here:

• Lockheed Martin's Aerojet Rocketdyne Acquisition Threatened by Raytheon Complaint
• Index Funds: Too Popular for Their Own Good?
• Disney: On Track for Streaming Domination in 2021?

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

About the author: