BofA Survey: Prospect of Fed Rate Cut Boosts Investor Confidence, Cyclical Stocks Expected to Benefit Significantly from Sharp Rate Cuts

According to the latest report from Zhitong Finance and Economics APP, a global survey by Bank of America shows that the optimistic sentiment surrounding the highly anticipated rate cut by the Federal Reserve has boosted investor confidence for the first time since June. Bank of America analyst Michael Hartnett stated in a report that the bank's confidence index based on cash levels, stock allocations, and growth expectations has risen from 3.6 to 3.9. In addition, fund managers believe that with the support of rate cuts for the economy, the probability of a soft landing for the U.S. economy is 79%.

However, Michael Hartnett added that despite this, investors remain "nervous bulls," with risk appetite falling to an 11-month low. He reiterated his preference for bonds last week. The survey also shows that investors are heavily shifting towards bond-sensitive industries such as utilities and moving away from sectors that typically benefit from a strong economy; global economic growth expectations have slightly improved from August, but 42% of respondents still expect a weakening economy.

The U.S. stock market has rebounded from its August lows as the market optimistically believes that with the Fed preparing to cut rates, the U.S. economy can avoid a recession. The Federal Reserve will announce its September interest rate decision early Thursday Beijing time. While investors generally expect the Fed to start a rate-cutting cycle, there is still a debate over whether the cut will be 25 basis points or 50 basis points.

Michael Hartnett stated that the survey indicates that economically sensitive (or so-called cyclical) stocks may benefit from a larger tactical rate cut. Currently, investors prefer sectors seen as bond proxies, with the risk exposure of the utilities sector reaching its highest level since 2009.

Furthermore, investors' allocation to consumer staples has reached its highest level in a year, while investment in the banking sector has reached its highest level since February 2023. At the same time, investors' allocation to technology stocks is at its lowest level since April 2023, and the reduction in energy stocks is at its highest level since December 2020.

This Bank of America survey was conducted from September 6th to 12th, with a total of 206 participants and total assets of $593 billion. The survey also shows that about 52% of respondents believe that the U.S. economy will not fall into a recession in the next 18 months; about 90% of respondents expect the U.S. bond yield curve to steepen, the highest level on record. In addition, respondents believe that the biggest tail risks include: U.S. economic recession (40%), geopolitical conflicts (19%), accelerating inflation (18%), systemic credit tightening (8%), U.S. elections (6%), and artificial intelligence bubble (5%)