Growing number of fund managers say US equities are overvalued and internet stocks are displaying bubble-like tendencies in the latest monthly Bank of America (BofA) Merrill Lynch Fund Manager Survey.
The technology sector has propelled a US stock market rally accounting for 30% of S&P 500 gains since the beginning of the year and at 16% is the biggest gainer on the index.
However, a tech sell-off that began late last week and carried over to Monday hints at unsettled investors and a reversal of risk.
More than half of the fund managers surveyed say that the current valuation of US and global internet stocks are expensive or are in a bubble.
Vulnerable to profit weakness
“Market vulnerability to profit weakness is very high,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch, “with investors’ perception of excess valuation coinciding with high global profit expectations.”
When it comes to regional allocation, 83% agree that the US is the most overvalued region, the highest level since the survey began compared to 18% who think European equities are undervalued and 48% believe that they remain undervalued.
Allocation to Eurozone equities remains near two-year highs with 58% overweight only slightly down from 59% overweight in May.
The view of corporates and valuations has also dampened with just 43% - a decrease of 13 points from the previous month - agreeing profit expectations will improve over the next 12 months .
Not comparable to '99 bubble
The good news is there's no sign that today's excess valuation is like the '99 bubble or "irrational exuberance" as there isn't a coinciding fall in cash levels.
In June fund managers' cash levels went up from 4.9% to 5.0% (>10-year average of 4.5%) suggesting cash remains too high for "Big Top".
Also the survey outlines that in comparison with the bubble of '99 a reminder that while vulnerability is high, the missing combo of higher yields/falling EPS is not in evidence.
Further, in June, global investors continue to favor the sector showing overweight positioning across all regions.
Fund manager says they are overweighted in technology, along with banks, industrials and consumer discretionary while avoiding utilities, telecoms, and materials.
Unable to prevent 'Icarus'
The survey also highlighted today's Federal Reserve announcement of its rate decision later this afternoon in a widely expected rise in US interest rates.
Alluding to perception that US equities are flying too close to the sun, investors say Fed action of a ""preventative hike" to subdue Wall St speculation was too little, too late to prevent Icarus".
The monthly survey of 210 respondents managing $513 bn in assets reveal that close to 50% say global monetary policy is “too stimulative,” the highest number in over six years.
The outlook for global economic growth is less rosy as only 39% expect higher growth a decline from close to 60% in January.
Inflation expectations in the next 12 months have also continued to fall, with 60% of fund managers calling for higher inflation.