Despite the strong confidence in AI capital expenditures, market sentiment has cooled compared to August, and concerns about systemic risks are rising.

Written by: Bu Shuqing, Wall Street Insights

The risk appetite of global fund managers is quietly shifting. Bank of America's September Global Fund Manager Survey (FMS) shows that "disorderly rise in bond yields" has for the first time surpassed "AI bubble" and has jumped to become the biggest tail risk in the market, reflecting investors' deep anxiety over interest rate prospects.

This survey was conducted from September 4 to 10, with 190 fund managers managing a total of $512 billion participating. The survey shows that 33% of respondents listed "disorderly rise in bond yields" as the biggest tail risk, up from 27% in August; meanwhile, "AI bubble," which ranked first last month, dropped from 32% to 28%, falling to second place.

At the same time, both the cash rule and bull-bear indicator from Bank of America FMS have sent out "sell" signals - cash allocation rose from 3.5% to 3.9%, and the bull-bear indicator reading reached 9.5, both in the sell zone.

The overall cooling of investor sentiment corroborates the aforementioned shift in risk appetite. Bank of America's broadest FMS sentiment composite indicator fell from 8.0 in August to 7.0, the lowest in nearly three months, while the previous August survey had been the third most optimistic monthly survey since 2022. In terms of asset allocation, fund managers increased their holdings in healthcare, industrials, and banks, while simultaneously reducing their holdings in REITs and consumer staples, with the latter's underweight level reaching the highest since January 2004.

Bond risks rise to the top, interest rate expectations shift significantly

Concerns in the bond market have intensified in the current survey. A net 36% of FMS investors expect short-term interest rates to rise, the highest level since September 2022; a net 25% believe that current global monetary policy is too loose, also the highest since September 2022.

Expectations for Federal Reserve policy showed clear divergence. The survey indicates that 52% of respondents believe the Federal Reserve will not raise interest rates before the midterm elections in November, a significant decline from 72% in August; meanwhile, 41% of respondents expect the Federal Reserve to raise interest rates before the midterm elections, up sharply from 22% in August.

Regarding the U.S. Treasury bond repurchase program, market reactions have also been cautious. In response to the decision to expand the bond repurchase program from September 9 to November 4, 46% of respondents believe it will have no impact on U.S. Treasury yields, while 29% think this move will lead to a rise in yields, and only 16% believe yields will decline as a result.

In terms of bond allocation, FMS investors are currently net underweight bonds by 48%, marking the largest underweight since May 2022, and they have been underweight in bonds for 17 consecutive months. The survey also shows that 27% of respondents believe that only if the yield on 30-year U.S. Treasury bonds rises to an attractive level of 6% will asset allocators shift to overweight government bonds.

AI capital expenditures still supported, but concerns about systemic risks are rising

Although the "AI bubble" has dropped from the top of the tail risk list, fund managers' confidence in AI capital expenditures remains strong. 79% of respondents do not believe that AI hyperscale cloud computing companies will announce cuts in capital expenditures by 2026, up from 71% in August; only 14% expect reductions in AI capital expenditures.

However, the proportion of AI hyperscale capital expenditures being seen as the most likely source of a systemic credit event has risen to 42%, up from 38% in August, with government debt in second place at 25%. Meanwhile, a net 33% of respondents believe companies are over-investing, which is in line with the historical high reached in February 2026.

In terms of the most crowded trades, "long global semiconductors" has consistently topped the list with 53%, "short U.S. bonds" ranks second with 18%, and "long Magnificent 7" comes in third with 7%.

The Asia fund manager survey shows a more cautious outlook on the monetization capability of AI. Bank of Asia's FMS indicates that 80% of respondents state that more clear evidence of AI monetization needs to be seen before they will increase allocation to AI-related stocks. 55% of Asian respondents believe that the positive impact of AI on the stock market has been "roughly reasonably priced" or "overpriced," a significant increase from 37% in August.

Macroeconomic expectations remain robust, "no landing" is still the mainstream judgment

Despite some cooling in risk sentiment, fund managers' overall assessment of the macroeconomic fundamentals remains optimistic. 55% of respondents expect the global economy to "not land," slightly below the historic high of 56% set in August; 38% anticipate a "soft landing," and only 2% expect a "hard landing," the latter remaining equal to the historic low set in July 2026.

A net 8% of respondents expect global economic growth to accelerate in the next 12 months, a decline from 14% last month. In terms of earnings expectations, the proportion of investors expecting double-digit growth in EPS over the next 12 months is the highest since August 2021.

Inflation expectations have slightly reversed, with a net 4% of respondents expecting global CPI to decrease, while in August a net 3% expected inflation to rise. 50% of respondents describe the global economy over the next 12 months as “stagflation” (below trend growth, above trend inflation), and 38% expect “prosperity” (above trend growth, above trend inflation).

In Asia, Bank of America's Asia FMS indicates that a net 55% of respondents expect improvements in corporate earnings in the Asia-Pacific region (excluding Japan), up from 45% in August. Investors expect a future 12-month return of 6.3% for the Asia-Pacific region (excluding Japan), which is in the 89th historical percentile; the expected return for the Japanese stock market has risen to 6.4%, in the 94th historical percentile.

Midterm election risk heats up, probability of Democratic sweep increases

Political risk has become another focus of this month's survey. 44% of respondents anticipate a midterm election outcome where the Democrats control the House of Representatives and the Republicans control the Senate; the probability of a Democratic sweep (controlling both houses) has risen from 23% in August to 31%.

If the Democrats sweep, 45% of respondents expect the market reaction to be "rising bond yields and falling stock prices," 19% expect "falling bond yields and rising stock prices," 13% expect "falling bond yields and falling stock prices," and only 4% expect a "prosperity" scenario where both rise simultaneously.

Asset allocation: increase in financial and healthcare, decrease in defensive sectors

In terms of asset allocation, the net overweight ratio of equities among FMS investors has decreased from 56% last month to 49%, but still remains above the long-term average by 0.9 standard deviations. The net overweight in commodities decreased from 24% to 19%, while the net underweight in real estate expanded from 7% to 21%, marking the largest underweight since September 2025.

In sector rotation, funds flowed into financials (banks and insurance), healthcare, and industrials in September, while flowing out of REITs, consumer staples, and telecommunications. The net overweight in banks rose to 34%, the highest since November 2025; the net underweight in consumer staples expanded to 33%, the largest underweight since January 2004.

In terms of regional allocation, U.S. stocks are net overweight by 25%, emerging market stocks by 38%, while eurozone stocks shifted from a net overweight of 6% last month to a net underweight of 5%. U.K. stocks are net underweight by 35%, marking one of the region's largest absolute underweights.

Bank of America’s contrarian trading suggestions include: long U.K. stocks / short U.S. stocks, long consumer staples / short banks, long small-cap stocks / short large-cap stocks.