Global investors are turning their attention away from trade-war fears and instead zeroing in on corporate earnings and artificial intelligence (AI) as key drivers of market sentiment and portfolio decisions. According to Bank of America’s July 3–10 Global Fund Manager Survey, 65% of respondents anticipate a “soft landing” scenario for the global economy, and 42% are already reporting gains in productivity attributable to AI.
Just a few months ago, investor anxiety over a global recession dominated discussions. Today, however, fears have significantly diminished. Only a minority now consider a recession likely, while a robust 65% expect a soft slowdown, and 21% foresee a scenario of “no landing”—steady growth despite inflationary pressures. This shift in outlook has propelled investor sentiment to its highest level since February, reflected in a sentiment score of 4.3, up from 3.3 in June.
Confidence in corporate earnings is also experiencing a meaningful resurgence. According to the survey, 42% of fund managers now expect second-quarter earnings-per-share to outperform expectations, a significant increase from only 19% anticipating upside in June. This enthusiasm is mirrored by Morgan Stanley’s earnings-revision breadth, which has swung into positive territory from –25% in mid‑April to +3% in recent notes. Analysts stress that markets may be poised for an “underpromise and overdeliver” moment as tariff uncertainties recede.
AI remains a dominant theme in market positioning. Survey results indicate that 42% of fund managers already see AI-enhanced productivity, with another 21% expecting notable gains by next year. Institutional flows have strongly favored the so-called “Magnificent Seven” megacap tech stocks—Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla—culminating in a sizzling rally in the Roundhill Magnificent Seven ETF (MAGS). Since its April 8 nadir, MAGS has surged nearly 40%, underscoring the potency of AI enthusiasm.
This AI-fueled momentum is reflected in broader sector allocations. Tech exposure has shifted from underweight to a net overweight of +14% among fund managers—the strongest tech bias since 2009. While investors applaud tech’s strong earnings, margins, and cash flow, some caution is emerging around lofty valuations.
Despite bullish sentiment, Bank of America analysts note that low cash levels—down to 3.9%, a 12-year low—have triggered BofA’s contrarian “cash rule” sell signal. However, rather than suggesting a market top, the team advises this is more about calibration—signaling rotation across sectors rather than wholesale liquidation. With volatility subdued, this could prompt caution towards hot sectors like tech and FX trades such as short U.S. dollar positions.
Several analysts argue that elevated optimism may lead to portfolio reshuffling rather than risk-off moves. BofA’s strategists predict investors will rotate out of crowded trades—like long tech and short dollar positions—and into undervalued areas, such as Japanese equities and U.S. value stocks. However, entrenched bullishness could hinder a sharp market reversal.
Trade frictions have largely faded into the background. While some fund managers still expect tariff rates around 15%, they no longer rank as top-tier concerns. Instead, attention is concentrated on AI-driven innovation and corporate profitability. Approximately 81% of managers anticipate one to two rate cuts by year-end, with only a small fraction expecting action as early as July. The U.S. dollar, once seen as a safe haven, has now become a popular contrarian short trade, surpassing even gold.
Bank of America’s July survey underscores a meaningful shift: trade concerns have given way to optimism around earnings and technological innovation. While investor confidence is at multi-month highs, signs of excessive positioning suggest a period of recalibration rather than a sharp sell-off. As portfolios evolve, the convergence of AI innovation, corporate earnings strength, and monetary policy direction will guide market direction into year-end.
