Cash Holdings Hit Record Lows as Investors Go Big on Stocks. What History Says Happens Next.

The world’s biggest fund managers are the most optimistic on stocks in nearly four years. (NYSE)

Key Points

• Global investors hold a record low 3.3% of assets in cash, indicating high optimism for the economy.
• Allocations to stocks and commodities are at their highest levels since February of 2022.
• An AI bubble is considered the market’s biggest ‘tail risk’ by investors, followed by bond yield surges.

Global investors are heading into next year with the lowest levels of cash on the sidelines on record, according to Bank of America’s closely-tracked survey of fund managers, and big bets in place on stocks, commodities, and President Donald Trump’s”run it hot” economic strategy.

In fact, BofA’s Global Fund Manager Survey (FMS) for December indicates the highest level of optimism for the economy in nearly 4½ years, with allocations to stocks and commodities at the highest levels since February of 2022. Fund managers are holding just 3.3% of their assets in cash, a record low, and see overall liquidity in global markets as the third best they have seen in 17 years.

That doesn’t bode well for the stock market. The S&P 500, for instance, peaked in January 2022, before sinking into a bear marker that year. BofA’s own takeaway suggests something similar. The firm recommends buying global stocks when cash is at 5% or more, but selling equities when cash holdings drop below 4%.

“Liquidity is likely as good as it gets, which has buoyed stocks in 2025, with lots of money chasing a few ideas,” BofA’s head of U.S. equity and quantitative strategy, Savita Subramanian, said in a separate report.

She sees fewer rate cuts from global central banks in 2026 and notes that “government stimulus is likely to ebb rather than flow as U.S. debt to GDP is at fresh, uncomfortable highs.”

Wall Street, however, continues its “what, me worry?” ways. The median price target for the S&P 500 at the end of next year sits near 7700, a level that would suggest a 13% advance from current levels. Oppenheimer’s forecast of 8100 is the Street’s highest, with Bank of America’s modest 7100 estimate holding up the lower end.

In terms of earnings, LSEG data suggests collective S&P 500 profits will rise by around 14.7% next year to $317.06 a share.

The Federal Reserve has also vowed to support banks with renewed purchases of Treasury bills over the coming months, a move that will lower short term borrowing costs and prevent a liquidity squeeze in the financial sector.

Investors are investing for a bullish outcome: The FMS shows the biggest overweight to equity markets since December of last year, with tech still the sector of choice with a net overweight of 21%, the highest since July of last year.

Still, there are risks. Longer-term Treasury yields should move higher next year, however, as the combination of loose monetary policy from the Federal Reserve and aggressive tax and spending plans tied to the Republican One Big Beautiful Bill Act drives bond prices lower.

Investors also expressed their concerns about a possible AI bubble. “FMS investors continue to believe that companies are overinvesting as concerns linger about the AI capex boom,” the report noted, although its gauge of worry eased from a record 20% to a net 14% of respondents who said companies are overinvesting in the new technology.

An AI bubble, however, remains the market’s biggest “tail risk” according to the December survey, followed by worries over a disorderly surge in bond yields and a renewed quickening of inflation pressures.

With investors all-in on the bull market, it won’t take a lot for history to repeat.

Write to Martin Baccardax at martin.baccardax@barrons.com