Here’s why investor sentiment among fund managers is ‘dire’

Bank of America finds the outlook for corporate profits is at its lowest since September 2008 when Lehman Brothers collapsed.

As the US stock market officially declines 20% from peak to trough to enter a bear market, professional investors are extremely pessimistic on the outlook for corporate profits and economic growth.

Bank of America’s monthly fund manager survey of investors with more than $830 billion (£690 billion) in assets combined found that Wall Street sentiment was “dire”, with global growth optimism at an all-time low and fears of stagflation (high inflation and low growth) at their greatest level since June 2008.

The outlook for corporate profits is at its lowest since September 2008 when Lehman Brothers collapsed.

Bank of America notes that pessimism on profits tends to occur at Wall St crisis moments, such as the bursting of the dotcom bubble, the Lehman bankruptcy and early spread of Covid-19.

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To counter these tough macroeconomic conditions, investors are hoarding cash, and buying oil, commodities and defensive healthcare stocks.

Investors are bearish on  bonds, European and emerging market stocks, as well as tech firms and consumer discretionary names, where demand could collapse in a recession.

Given how high inflation is today, at around 9% in Britain and America, investors expect it to come down next year. Nonetheless, they forecast that it will remain elevated relative to history.

Bank of America notes that the US central bank’s interest rate decision, scheduled for today (15 June), could send markets in two different directions.

If it announces a 0.5 percentage point hike, considered to be not enough to tame inflation by professional investors, then markets would sell off, which in theory will benefit oil and resources.

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If the Federal Reserve is more aggressive than investors expect and increases rates by 1 percentage point, then this is expected to boost emerging markets and technology stocks, many of which are unprofitable.

Stock markets have collapsed this year due to rising interest rates and stubbornly high inflation. Not only does a weak economy threaten corporate profits, but a higher return from safe government bonds decreases the appeal of stocks, particularly those that are not yet profitable.

The S&P 500 has fallen 22% since its peak in early January, or around 11% in sterling due to a weaker pound. However, the UK market, which is cheaper and has a higher dividend yield, has fallen just 6.5% from its highs.