BofA Fund Manager Survey: Rate cut expectations squeezed out—what is the biggest risk the market fears now?

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Global fund manager sentiment deteriorated sharply in April, but has not yet triggered a systemic sell signal.

According to Chase Wind Trading Desk, Bank of America’s April Global Fund Manager Survey (FMS) shows investor sentiment has dropped to its lowest level since June 2025, with the decline in growth expectations seeing the biggest drop since March 2022. Meanwhile, inflation expectations have seen the biggest surge since May 2021, and rate cut expectations are gradually being priced out.

The survey was conducted from April 2nd to 9th, with 193 fund managers managing a combined $563 billion participating. About three-quarters of respondents completed the survey before the ceasefire news was released on April 8th.

The survey shows that 76% of respondents expect the global economy to fall into “stagflation” (below trend growth combined with above trend inflation), a sharp jump from last month's 51%. Meanwhile, global equity allocation dropped sharply from net overweight 37% to net overweight 13%, the lowest since July 2025.

Geopolitical conflicts remained the top tail risk for the second consecutive month, and fund managers predict year-end oil prices at $84 per barrel, about 38% higher than predictions at the beginning of the year.

Sentiment deteriorates sharply, but recession expectations remain a minority

BofA FMS Composite Sentiment Indicator—which covers cash levels, equity allocations and global growth expectation—plunged from 5.6 to 3.7, its lowest since June 2025. Recent previous lows include: 1.7 in April 2025 during the "tariff panic", 1.6 in October 2023 at the S&P 500 local low, and 0.3 in October 2022 during the UK pension crisis.

Despite the sharp weakening in sentiment, investors' judgments on the economic outlook remain relatively moderate.

52% of respondents believe the global economy is most likely to achieve a “soft landing”, 32% expect “no landing”, and only 9% expect a “hard landing”. Net global growth expectations plunged from +7% last month to -36%, the lowest since August 2025; global corporate earnings expectations also turned negative for the first time since September 2025, dropping to -14%, compared with a high of +44% in January of this year.

Inflation expectations surge, rate path shows divergence

The jump in inflation expectations was one of the standout changes in this survey.

A net 69% of respondents expect global CPI to rise in the next 12 months, up sharply from last month’s 45%, the highest since May 2021.

Meanwhile, a net 4% of respondents expect short-term interest rates to rise in the next 12 months—this is the first time since November 2022, meaning that rate cut expectations are gradually being priced out.

Expectations for the Fed are clearly split: 58% of respondents still expect a Fed rate cut in the next 12 months, 29% expect to remain unchanged, and 10% foresee a rate hike.

For the European Central Bank, 46% of respondents expect a rate hike, 36% expect no change, and only 12% expect a rate cut—this reflects rising concerns over inflation pressure in the eurozone.

Yield curve steepening expectations also fell sharply, with a net 29% of respondents expecting a steeper curve, down sharply from the peak of 80% two months ago, and the lowest since November 2022.

Geopolitical risk dominates tail risk, oil price and semiconductors become most crowded trades

Geopolitical conflict topped tail risk for a second straight month, with 44% of respondents ranking it as the primary risk—up sharply from February's 14%.

The median forecast for year-end oil prices among respondents is $84 per barrel, about 38% higher than the starting point of Brent crude at $61 per barrel at the start of 2026. 28% of respondents expect oil prices to rise to $90 or above, compared to just 12% a month ago.

Among the most crowded trades, “long oil” and “long global semiconductors” tied for first place at 24% each, replacing last month’s “long gold” (35%) and “long global semiconductors” (35%).

As for credit risk, 57% of respondents believe that US shadow banks (private credit) are the most likely source for a systemic credit event, and this view has held the top spot for nine months straight; credit default risk indicators have risen to their highest since October 2023, with a net 65% of respondents believing credit default risks are above normal, compared with just 17% two months ago.

Asset Allocation: Cutting Japan and Eurozone, adding EM and tech

April’s allocation adjustments show clear defensive and rotational features.

Investors increased allocations to cash, the dollar and telecoms, while cutting stocks, Japan, and healthcare:

Japanese stocks turned from net overweight 14% to net underweight 11%, the first significant underweight since November 2024; Eurozone stocks' overweight ratio fell from 21% to 4%, the lowest since January 2025; global banks’ overweight ratio dropped from 24% to 11%, the lowest since October 2024.

Emerging market equities remain the highest absolute allocation, with net overweight 41%, one standard deviation above the historical average; the overweight ratio for tech stocks rose from 7% to 14%, as investors counterintuitively increased positions despite weakened overall sentiment. Underweighting of the dollar narrowed to its lowest since March 2025, showing some investors started to cover short dollar positions.

For contrarian trading opportunities, BofA strategists noted that if a bull market surprise occurs in Q2, the most likely driver is falling oil prices, declining inflation and actual rate cuts, which is most favorable for bonds, consumer discretionary, REITs and Japanese stocks; in the case of a bear market surprise, continued rising recession risks will hit commodities, materials and emerging market equities hardest.

Risk warnings and disclaimersThe market involves risk; investments require caution. This article does not constitute personal investment advice, nor does it take into account individual users' specific investment objectives, financial situations or needs. Users should consider whether any opinions, views or conclusions in this article are suitable for their own circumstances. Invest accordingly at your own risk. ```