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Record Percentage of Fund Managers Call U.S. Tech Stocks the ‘Most Crowded’ Trade

Bank of America strategists suggest shorting tech and making contrarian long bets.

The highest portion of fund managers ever believe U.S. technology stocks are the most crowded trade, as investor sentiment remains cautious amid the pandemic, according to Bank of America Corp.’s latest monthly survey.

A majority of fund managers believe the stock market is overvalued, with a record 74 percent citing tech as the most crowded position, Bank of America investment strategists said in a report Tuesday. The strategists suggested shorting tech stocks “given positioning and stretched performance.”

The U.S. stock market has rebounded this year even as investors lack conviction that the economy will see a strong and lasting recovery amid the Covid-19 pandemic, the survey shows. While 72 percent of fund managers are expecting stronger economic growth, just 14 percent anticipate a “V”-shaped recovery while almost a third believe it will follow the shape of a “W.”

The strategists predicted that stock prices this summer will be both “choppy” and higher, recommending that investors sell the Standard & Poor’s 500 index at above 3,250 and buy it below 2,950. Beyond shorting tech, they suggested contrarian long bets on energy and banks.

Boston-based investment firm GMO also likes bank stocks, saying in a recent paper that the pandemic has created an “extraordinary risk/return trade-off” for shares of high-quality banks in the U.S. “There is the potential for decent returns for bank investors without improvement in the current environment, and the potential for enormous returns if the rate of change in the economy remains positive,” GMO’s focused equity team said in the paper. 

[II Deep Dive: GMO, Long Bearish, Finds a Sector It Loves]

A potential second wave of Covid-19 cases now dominates investors’ concerns, with 52 percent citing it as the top “tail risk,” according to the Bank of America survey. The U.S. presidential election is their second biggest worry.

Investors are most likely to take no action in the run-up to the U.S. election, the bank’s survey found. Thirty-four percent of fund managers said they would make no changes as the November election approaches, while 31 percent expect to reduce risk exposure. Fifteen percent of investors plan to buy volatility and 13 percent said they would sell the U.S. dollar.

After tanking in the first quarter, the S&P 500 index has rebounded to post gains this year of about 2 percent through July 13. The index was quoted around 3170 in early afternoon trading on Tuesday, up less than one percent.

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