Stock investors are increasingly bullish—the most they’ve been in years. Now is not when folks should start aggressively buying the market.

Bank of America, which surveys trillions of dollars’ worth of equity funds, revealed that investors are feeling their most bullish on the market since November 2021. BofA’s measure of bullishness essentially accounts for how much stock the fund managers own, and how fast they think the economy can grow.

Simply put, people want to be heavily invested in the market because they think the economy and corporate profits will continue to grow. The U.S. has sidestepped recession so far, even though the Federal Reserve aggressively lifted interest rates in 2022 to tamp down inflation. The belief is that inflation is cooling down enough for the Fed to refrain from hiking rates any further. It could even cut rates once or twice soon. That, combined with ongoing job gains, would keep the economy growing and allow companies—large and small—to see sustained sales and profit growth.

That’s why fund managers don’t want to miss out on more market gains—and why they’ve loaded up on stocks, pushing the S&P 500

SPX

0.25%

up 48% from its late 2022 low point. Fund managers are now the most overweight equities since January 2022. In the May survey, a net 41% of investors surveyed had an overweight position in stocks, up seven percentage points from April.

They’ve used up a lot of cash to buy stocks. Cash as a percentage of the average portfolio is down to 4% from 4.2% in April for the lowest percentage since the first half of 2021.

This dynamic—when everyone is already super bullish—is a sign investors should be wary about stocks.

“All the high-fives about the current rally are a bit worrisome,” writes Nicholas Colas, DataTrek founder. “Instead of yelling, you should be selling.”

The rationale is rooted in the fact that there’s now much less money on the sidelines to bid stocks higher. Sure, cash-allocation levels have been lower in the past, but not by much. Managers have already used up tons of cash to buy up most of the stock they’ve wanted, and they’re maintaining some allocation to cash—which yields about 4% today. That makes sense, especially because risks to stocks remain. In fact, the current cash level doesn’t trigger a “buy” signal for BofA on the stock market. Instead, the bank is neutral.

There’s good reason for caution. The positive economic narrative isn’t a sure thing. If everyone had complete clarity about the Fed’s moves, and faith that the economy will remain strong, the market would run even higher, but nothing is for sure. Already, retail sales this week revealed a low-single-digit percentage year-over-year growth rate in the volume of goods sold for April, which indicates weakening consumer demand.

Meanwhile, the Fed may not be the savior the market sees it as; inflation has remained well above the central bank’s target for several months, and if there are no rate cuts, the economy could slow even more—threatening to cause a drop in the stock market.

Wait for better prices before plowing all of your cash into the stock market.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com