Money managers are returning to U.S. equities in June while cash levels continued to decline, said Bank of America Merrill Lynch's monthly fund manager survey released Tuesday.
Managers' U.S. equity allocations climbed to a net 1% overweight this month, up from a net 15% underweight last month. Meanwhile, managers' average cash holdings ticked down to 4.8% in June from 4.9% in May, but still above the 10-year average of 4.5%.
The survey showed that 64% of respondents think the U.S. has the most favorable outlook for profits, which is a 17-year high. All other regions have net negative profit outlooks.
Meanwhile, a record 42% of investors surveyed say companies are overleveraged, far exceeding the 32% peak in 2008. An all-time high net 34% of respondents think that corporate balance sheets are overleveraged.
The survey shows that investors are selling cyclical plays — such as banks, emerging markets and eurozone equities — in favor of defensive sectors and U.S. equities.
When asked what catalyst is most likely to stop tightening from the Federal Reserve, 69% of investors surveyed cited domestic reasons, such as lower inflation, higher unemployment and Fed independence; while 23% cited emerging market contagion or a debt crisis in the peripheral European Union.
This month, the most commonly cited tail risk to the markets is a trade war (31%), followed by a Fed/European Central Bank hawkish policy mistake (26%) and a euro/emerging markets debt crisis (23%). Trade tensions have been the dominant macro concern for investors in 2018.
Managers' average allocation to commodities hit a new eight-year high for June, rising to a net 7% overweight from 6% overweight last month, according to the survey.
Expectations for faster global growth held steady with just a net 1% of investors indicating they think the global economy will strengthen over the next 12 months. This is still the lowest level since February 2016.
"Investors have their eyes on the U.S. this month with a record-high favorable outlook for profits and a return to U.S. equity allocation," said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release about the survey results. "Decoupling is back in vogue."
The survey of 225 money managers representing a total of $684 billion in assets under management was conducted June 1-7.