Bank of America's monthly report on global fund managers, one of the market's go-to assessments for outlooks on the world of finance, sometimes has a ring of closing the stable door after the horse has bolted to its findings.
That's even more true today, given the report, which tracks the 200 global fund managers who manage more than half a trillion dollars in global wealth, showed a record rise in equity allocations and a big reduction in overall cash levels as stocks hit a series of all-time highs and the first quarter earnings season showed the biggest gap between forecasts and profits since the Covid pandemic.
But it also showed a sense of concern among those polled, who see a quick end to the Iran war, a re-opening of the Strait of Hormuz and Federal Reserve rate cuts within the next 12 months, tied to the market's hottest trade.
Nearly three quarters of respondents cited "long global semiconductors" as the market's most-crowded trade, a tally that topped inflationary pressures at around 40%. Added to that concern, the most cited "tail risk" to the market was deemed to be a credit event, which around 34% of those surveyed said could come from artificial intelligence and the hyperscalers.
That's worth noting, given that close to two thirds of the S&P 500's gains since the nadir of late March, which have added around 13% to the benchmark and taken it to a series of all-time highs, have come from the megacap tech trade.
An index of the so-called Magnificent Seven tech stocks has risen more than 18% since the start of the second quarter, with all-time highs for Apple, Nvidia, and Google parent Alphabet. The PHLX semiconductor index, meanwhile, has surged nearly 50% since hitting a year-to-date low on March 30.
But cracks are starting to appear.
The semiconductor benchmark traded lower for the third consecutive session on Tuesday, putting its decline from last week's record high to around 9.8%, dragging the Nasdaq lower amid a surge in Treasury bond yields and worryingly elevated crude prices.
Intel, one of the sector's standout performers over the past year, has slumped around 15% over the past week, with Micron Technology Inc. down a similar amount over the past three sessions.
Software stocks, meanwhile, are staging something of a comeback, with the iShares Expanded Tech-Software Sector ETF rising 8.6% from last week's low to take its overall gain for the month of May to around 17.6%.
That still leaves it down 6.6% for the year, however, compared to a 56% advance for the PHLX Semiconductor Index.
Big moves in the bond market aren't helping.
Benchmark 30-year paper traded north of 5.17% in early Tuesday trading, the highest level since 2007, while 10-year notes topped 4.65%, the highest since February of last year.
Bank of America, in a separate report published Tuesday, noted that the VanEck Semiconductor ETF, which tracks the same stocks in the PHLX Semiconductor Index but uses different weightings, is trading in "an extreme overbought condition" that could signal a near-term slide.
"With no clear topping pattern or blow-off climax to signal a peak, positioning becomes more tactical. Given the combination of extreme [relative strength index] and exhaustion signals, history suggests watching for bearish reversal candles," the bank said.
Nvidia's first quarter earnings on Wednesday could certainly support the broader semiconductor trade, with the AI chipmaker's outlook, and commentary on demand, closely-tracked by Wall Street.
But so will its comments on the chip sector.
"I think they're going to be asked, in a number of different ways, to comment on what they're seeing in some pockets of the semiconductor market that have gone crazy over the last several weeks, specifically memory and CPUs," said John Belton, portfolio manager at Gabelli Funds.
With chip stocks now edging closer to correction territory, bond yields testing multi-year highs, oil prices holding north of $110 a barrel and the Fed not in any sort of hurry to cut rates, the market's hottest trade may be getting overcrowded.
Whether investors decide to pare back those positions remains to be seen.
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