The Bank of America Fund Manager Survey shows that global investor sentiment is the strongest it has been since February 2025. The likelihood of a hard economic landing is at its lowest since January 2025. Equity allocations are rising but are still managed carefully. A net 78% of respondents expect short-term interest rates to drop within the next year. A trade called “Long Mag 7” is seen as the most crowded by 45% of those surveyed, matching last month’s insights. The survey indicates that 20% believe Waller might become the next Fed chairman, while Hassett is at 19% and Warsh at 15%. Despite this optimism, many feel that inflation is a bigger threat than trade wars. There are worries that the Federal Reserve wants to lower rates at the same time that inflation rises, which could make inflation a greater concern.

Market Conditions Signal Low Risk

Currently, market conditions are viewed as low-risk, with stock prices nearing record highs, tight credit spreads, and anticipated rate cuts. This suggests that there’s little room for mistakes. With investor sentiment soaring since February 2025, the market is priced for perfection. Stock prices are near all-time highs, and many believe rate cuts are guaranteed. The VIX, a measure of market volatility, is hovering around 13, a level not consistently seen since late 2024, indicating a sense of calm in the market. This optimism clashes with the possibility that inflation could rise again, which might delay the Federal Reserve’s planned rate cuts. The latest Consumer Price Index (CPI) reading for July 2025 was 3.4%, slightly higher than expected and marking the second month of increases. A strong economy, combined with the Fed wanting to cut rates, could lead to higher inflation instead of lower.

Volatility Appears Underpriced

Given these conditions, volatility looks underpriced, making protective options strategies more affordable. Buying puts on major indices like the S&P 500 or Nasdaq 100 can serve as a simple hedge against any unexpected bad news. This is particularly important as the market has little room for error. The “Long Magnificent Seven” trade is now widely recognized as crowded, presenting a significant concentration risk. These specific stocks have accounted for over 60% of the S&P 500’s gains so far in 2025. Any change in sentiment could lead to a quick reversal, potentially resulting in large losses for these stocks. We can recall market sentiment in late 2021 when a similar level of optimism faced a sharp downturn once the Fed became more focused on inflation in 2022. The current high expectations and low perceived risk feel similar, which makes seeking downside protection a wise choice in this fragile environment. Traders should consider buying put options on ETFs that heavily feature the Magnificent Seven or on the individual stocks themselves. These positions could gain from either a general market decline or a shift away from the most crowded trade. The low implied volatility makes the cost of such defensive strategies attractive right now. Create your live VT Markets account and start trading now.

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