Recent surveys among market participants indicate a notable shift in sentiment within the US financial markets following NovemberThis change reflects a trend where US stocks have struggled in performance when compared to several of their global counterpartsA newly released study by Bank of America reveals a record number of fund managers who perceive US stock valuations as excessively highMeanwhile, Goldman Sachs has highlighted an alarming trend: the increasingly narrowing excess returns of technology giants compared to other companies, potentially presenting a headwind for future growth.

This evolving landscape indicates that the optimism often associated with the “exceptionalism” of the US economy is now confronting substantial challengesThe Bank of America fund manager survey outlined a broader sentiment indicator—incorporating stock allocation and global growth expectations—rising from 6.1 in January to 6.4 this month, although this remains beneath the December peakAmong the 205 managers overseeing an impressive $482 billion in assets, there’s a keen awareness of the shifting tides; the confidence in heavily investing in American tech stocks has diminished significantly.

Specifically, 89% of surveyed fund managers deemed US stock valuations as overstated, marking the highest level of concern since April 2001. An interesting trend has emerged as attention diverts from US markets to international opportunitiesThirty-four percent of respondents anticipate global stock markets could outperform the US by 2025, showcasing a growing interest in other regions.

Recent investment allocations reflect this shift, with many fund managers increasing their stakes in European equities, bonds, and defensive sectorsThere is a palpable sentiment that this year, Europe’s STOXX 50 index may eclipse the US NASDAQ 100 index, a marked change from recent historical trends that saw American markets leading the charge.

In terms of overall performance, key indicators suggest that the premium that large-cap tech stocks have enjoyed is now at historically high levels, nearly unprecedented since the dot-com bubble's burst

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The S&P Global Investment Manager Index indicated a drop in risk appetite to the lowest level since its inception in October 2020. Those surveyed pinpointed elevated valuations as the primary concern impacting short-term returnsAccording to Williamson, an executive director at S&P Global, the mood among US equity investors has shifted markedly into a pessimistic territory, reflecting one of the poorest risk profiles in the past five years.

This lack of confidence is echoed among retail investors as wellA survey conducted by the American Association of Individual Investors last week revealed that over 47% of participants foresee a decline in the stock market over the next six monthsSince late 2023, bearish sentiments have surged, peaking at levels not seen previously when markets were beginning to recover from a painful downturn, as demonstrated by a 10% dip in the S&P 500 from early August to the end of October 2023.

Goldman Sachs has advised a pivot in focus from popular AI stocks, suggesting that the upcoming earnings reports will be critical for these tech giantsRemarkably, this will mark the first instance since 2022 that the so-called "seven giants" of tech have not delivered a slew of positive surprises in their earnings announcementsHistorically, these large tech corporations have been the driving force behind the revenue and earnings growth within the S&P 500, yet the scope for such outsized surprises appears to be diminishing as the performance of the remaining 493 companies appears to be on the rise.

Next week’s earnings report from NVIDIA may represent a critical juncture for these high-flying tech stocksGoldman’s strategists are noting a distinct narrowing of the performance gap between leading tech companies and their peers in the S&P 500. They caution that this could result in a decline in relative performanceHistorically, the success of these "seven giants" has pointed to their profitability edge; predictions for 2025 suggest that the growth of their excess profits will shrink from a staggering 32 percentage points in 2024 down to just 6 percentage points in 2025 and further to 4 percentage points by 2026.

Bank of America asserts that US corporate capital expenditures remain relatively tepid, with large corporations exhibiting substantial increases in spending related to artificial intelligence

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Alarmingly, post-earnings report reactions indicate heightened concerns surrounding these companies' monetization, particularly as geopolitical risks associated with the AI arms race, such as those involving US semiconductor firms, come into sharper focus.

In light of these developments, Goldman Sachs advises a recalibration of risk exposure towards what they term phase three of AI investment targetsThey identify firms poised to potentially monetize AI through the generation of incremental revenue, primarily in areas like software and IT servicesThis “second phase” reflects the enthusiasm for chips, cloud providers, security software, hardware, and devices; however, strategic investment should concentrate on companies leveraging AI to boost productivity, especially within labor-intensive fieldsThe crux is to seize opportunities in sectors where AI can dramatically enhance operational efficiency and market competitiveness.

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