Investors are demonstrating the highest risk appetite in 15 years, according to a survey conducted by Bank of America. Fund managers have reduced their cash holdings to the lowest level since 2010, indicating a growing preference for equities and other higher-risk assets. More than one-third of respondents expressed confidence that global stock markets will deliver the highest returns this year, while 77% of fund managers expect the Federal Reserve to cut interest rates, Bloomberg reports.
Since late 2022, global stock markets have surged by over 60%, largely fueled by optimism surrounding artificial intelligence (AI) and the resilience of the U.S. economy. However, much of this growth has been driven by just a few major U.S. tech giants, raising concerns about market concentration. Now, investors are shifting their focus toward cheaper European stocks, which are seen as offering better value opportunities.
The BofA survey revealed that 89% of respondents believe that U.S. stock valuations are too high, suggesting that the rally in mega-cap tech stocks may have reached its peak. The longstanding belief in the “exceptionalism” of the U.S. market is beginning to fade, as more investors seek diversification through European equities. Some analysts believe this rotation could lead to a broader market rally, benefitting sectors beyond just technology.
In addition to shifting market preferences, concerns over macroeconomic risks remain. The survey highlighted two key threats that could disrupt markets in 2025: a potential global trade war and an uncontrolled surge in bond yields. Rising bond yields could trigger a wave of capital outflows from equities into fixed-income assets, which might slow down the recent stock market rally.
Analysts note that the increased risk appetite is also reflected in the surge of corporate debt issuance, as companies take advantage of relatively low borrowing costs ahead of expected rate cuts. Some investors are also betting on emerging markets, expecting higher growth potential outside of the U.S.
Another interesting trend highlighted by BofA is the growing popularity of alternative assets such as cryptocurrencies and private equity, as institutional investors seek to diversify beyond traditional stocks and bonds. The survey suggests that hedge funds and pension funds are actively exploring digital assets as part of their long-term strategies.
Despite the strong optimism, some market participants remain cautious. Experts warn that if the Federal Reserve delays rate cuts or if inflation remains stubbornly high, risk assets could face sharp corrections. Additionally, geopolitical uncertainty, including trade tensions between the U.S. and China, could introduce unexpected volatility in global markets.
As 2025 unfolds, investors will be closely watching central bank decisions, corporate earnings reports, and geopolitical developments to assess whether this risk-on sentiment is sustainable or if the market is overheating.
