After investors entered August with some of their most aggressive stock positioning in years, Bank of America's latest fund manager survey shows a clear pullback. The net share overweight global equities has fallen to 49% from 56%, while investors have begun rebuilding cash positions.
The change comes as the U.S. 10-year Treasury yield surged above 5%, reaching its highest level since 2007 amid persistent inflation concerns, elevated oil prices and expectations that interest rates could remain higher for longer.
The biggest concern now isn't weak earnings or an imminent recession.
It's the bond market.
Bond Yields Are Becoming the Market's Biggest Risk
A disorderly bond selloff has emerged as the top tail risk in BofA's latest survey.
That is a sharp shift from August, when fund managers had pushed global equity exposure to a net 56% overweight, the highest since November 2021, while cash levels fell to just 3.5%.
The mechanics behind why higher Treasury yields hurt stocks become particularly important when government bonds offer returns around 5%.
Investors can earn attractive yields without taking equity-market risk, increasing the hurdle stocks need to clear.
And the bond move is not confined to America. Yields have climbed across major markets including Germany, Japan and Australia, turning the current selloff into a broader global repricing of interest-rate risk.
Investors Aren't Bearish Yet
The interesting part is that fund managers are becoming more cautious without abandoning their underlying economic optimism.
Investors still expect healthy corporate earnings and economic growth. That suggests the increase in cash and reduction in stock exposure looks more like risk management than panic.
There are signs of that elsewhere. U.S. ETF investors have increasingly favored short- and intermediate-term bonds, with short-term Treasury ETFs attracting $12.2 billion over 20 trading sessions through Sept. 8.
In other words, investors aren't necessarily betting on a crash. They're finding alternatives to equities more attractive.
Why Tech Stocks Could Feel It Most
Technology and AI stocks could face the biggest test.
High-growth companies are particularly sensitive to interest rates because much of their valuation depends on profits expected years into the future. That helps explain why AI and tech stocks are unusually sensitive to rising yields.
At the same time, higher oil prices are keeping inflation pressure alive. The recent return of crude toward $108 has already put Bitcoin and technology stocks under renewed pressure.
Yet investors haven't abandoned the AI story. Bank of America strategists argue that earnings growth in the sector remains strong enough that today's bond-market pressure has not yet derailed the trade.
That leaves Wall Street in an unusual position.
Fund managers still like earnings, economic growth and AI. What they increasingly dislike is the amount of risk required to chase those themes when Treasuries can offer around 5%.
If yields keep rising, 49% equity overweight may not be the end of the retreat.
