Long Gold Tops Most Crowded Trades; "AI Bubble" Emerges as Biggest Tail Risk

 

Bank of America’s October Global Fund Manager Survey shows global fund managers’ optimism for stocks hit its highest since February, but as AI concept stocks have surged strongly this year, concerns about an AI bubble are reaching unprecedented levels.

 

(Investor Sentiment Indicator)  

 

The survey, conducted from October 3 to 9, collected views from 166 participants managing $4 trillion in assets.  

 

Fund managers’ stock allocation rose to an eight-month high this month, while bond allocation fell to its lowest since late 2022. Commodity and emerging market stock allocations surged to multi-year highs.

 

 

Respondents’ cash allocation plunged to 3.8%, an “extreme low” in survey history.

 

 

This indicates aggressive risk appetite among institutional investors, with liquidity conditions seen as the best since September 2021.

 

 

Fund managers have largely dismissed recession fears. The survey shows the biggest six-month rise in optimism for economic growth since October 2020.

 

 

33% of respondents expect a “no-landing” scenario (strong growth and inflation), a new eight-month high from 18% in September. Those expecting a “soft landing” dropped to a six-month low of 54%, down from 67% in September. “Hard landing” expectations fell from 10% to 8%.

 

 

The survey shows fund managers have turned overweight on U.S. stocks for the first time since February.  

 

However, behind the bullish positioning, valuation concerns are mounting. A record 60% of respondents view global stock valuations as too high.

 

 

54% believe AI concept stocks have entered bubble territory.

 

 

In this survey, the “AI stock bubble” (33%) topped tail risks, surpassing “second wave of inflation” (27%) and “Fed losing independence and dollar devaluation” (14%).

 

 

For comparison, September’s top three tail risks were “second wave of inflation” (26%), “Fed losing independence and dollar devaluation” (24%), and “disorderly bond yield rise” (22%).  

 

The survey also shows “long gold” has become the most crowded trade. 43% of respondents listed “long gold” as the most crowded, edging out “long Magnificent Seven” at 39%.

 

 

Earlier this month, spot gold broke $4,000 per ounce for the first time. Yet, few fund managers may have benefited. 39% report near-zero gold positions, 19% hold ~2%, and 16% hold ~4%. The weighted average gold allocation is just 2.4%.

 

Bank of America strategist Michael Hartnett noted in the report: “This month’s top three tail risks are AI bubble, second wave of inflation, and Fed loss of independence/dollar devaluation. By contrast, trade war risks (5%) have eased significantly from April’s record 80% peak as the biggest tail risk.”  

 

The BofA report also mentioned that even with overstretched positioning, investors see returns worth the risks. Private credit is seen as most likely to trigger systemic events, signaling cracks beneath the optimistic surface.  

 

The survey shows a strong shift in market risk appetite, likely sustaining stock and commodity rallies short-term, but crowded trades like gold and AI suggest vulnerability to sudden reversals if inflation or policy expectations shift.