Bank of America’s fund manager survey out this week—which encapsulates trillions of dollars in assets under management—found that the average manager holds about 4.9% of the portfolio in cash. That’s down from about 5.5% in the first half of this year and notably lower than a multi-decade high of 6.3% seen in October 2022.
Cash holdings have declined partly because managers have already deployed some of those dollars in stocks, helping to drive the market higher. The S&P 500 has climbed 25% from its October 2022 bottom. That’s why cash is now gradually moving from a factor that can push the stock market higher to something that could hold it back. Portfolio managers now have less cash to put to work in stocks, especially as the S&P 500 is more expensive and risky: The index trades at about 19 times next year’s earnings expectations, compared with just under 16 times at the October 2022 bottom. And investors remain worried about delayed damage to the economy and corporate profits from higher interest rates.
There is, however, a caveat. It isn’t as if there’s a dearth of cash on the sidelines, as the multi-decade lows for cash holdings stand at a distant 3.5%. That makes it seem plausible that portfolio managers could still sprinkle a few more dollars into stocks.