Market rallies on 'Hormuz Hope,’ but ‘frothy bull' is gone, says fund managers

Stocks came roaring back on Wednesday, on hopes of a wind-down in the Middle East. But is that the full picture?

As President Donald Trump prepared to address the Iran war on Wednesday night at 9 p.m. EDT, anticipation of a potential way out of the latest flare-up sent the S&P 500 to its biggest one-day gain in nearly 10 months on Tuesday. The rally continued on Wednesday.

But the damage may already have been done. According to Bank of America’s March Global Fund Manager Survey, the mood on Wall Street has already changed.

The survey showed investors turning markedly more defensive in March, hoarding more cash, slashing growth expectations, and growing more uneasy about both geopolitical conflict and the fragility of private credit.

Conducted from March 6 through March 12, the survey covered 181 fund managers overseeing $529 billion in assets.

Global fund managers lifted cash holdings to 4.3% from 3.4%, the biggest one-month increase since March 2020.

BofA’s broad gauge of investor sentiment fell to 5.6 from 8.2, reaching a six-month low.

Growth outlook deteriorates sharply

The macro outlook also darkened.

A net 7% of respondents said they expected stronger global growth over the next 12 months, down from 39% a month earlier. A net 45% said they expected higher inflation, up from 9% in February.

Expectations for lower short-term interest rates fell to a net 17%, the weakest reading since February 2023.

Fund managers were bracing for slower growth, stickier inflation and fading hopes for easier policy. More than half of respondents, 51%, said they expected a stagflationary backdrop over the next year, up from 42% a month earlier.

Even so, that anxiety stopped well short of outright recession fear. Nearly half of those surveyed, 46%, said a “no landing” remained the most likely outcome for the global economy, while 44% expected a soft landing and only 5% saw a hard landing.

Investors rotate toward defensive positions

Geopolitical conflict replaced the AI bubble as the market’s top perceived tail risk in March, cited by 37% of fund managers, up from 14% a month earlier.

At the same time, 63% said private equity and private credit were the most likely source of a systemic credit event, extending a drumbeat of concern that has been building for months.

BofA’s own measure of credit-default risk jumped to its highest level since April 2025.

Yet the move did not amount to a wholesale retreat from risk.

Fund managers remained a net 37% overweight equities in March. Commodity allocations rose to a net 34% overweight, the highest since April 2022.

BofA concluded that sentiment had turned bearish, saying Iran and private-credit concerns had ended the “frothy bull” mood of recent months. Even so, positioning remained far from the deeply washed-out levels that have marked major lows in stocks and credit over the past 15 years.

Instead, the survey suggested that positioning pointed to a rotation toward more defensive sectors rather than a broad exit from markets.

Managers remained most overweight emerging-market equities, healthcare, equities and commodities, while staying most underweight bonds, consumer-discretionary shares and the U.S. dollar.

Gold and global semiconductors tied for first place, each named by 35% of respondents. Only 9% said “long Magnificent 7” was now the most crowded trade, down sharply from its December peak.

Related: Oil prices top $100 again as Iran supply risks continue