(Bloomberg) -- Wagers on interest rate cuts have sent investor optimism to a two-and-a-half-year high, but stocks will suffer if evidence of stagflation materializes, according to Bank of America Corp. strategist Michael Hartnett.

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According to BofA’s global poll, a majority of fund managers see the Federal Reserve cutting rates in the second half of 2024. That has lifted sentiment — derived from a combination of cash levels, equity allocation and economic growth expectations — to the highest since November 2021.

Within that mix, however, the outlook for economic growth and corporate profits has deteriorated for the first time this year, the survey showed.

“Risk assets are vulnerable to more evidence of stagflation,” Hartnett wrote in the note.

After the S&P 500 Index hit a record in March, the rally in US stocks has slowed as economic growth shows signs of stumbling while inflation stays sticky. Traders are bracing for consumer price data due Wednesday from the US, which could cement or ease the stagflation concerns.

According to the survey, expectations for global growth fell for the first time since November, with a net 9% of participants now anticipating a weaker economy over the next 12 months. Still, about 78% said a recession was unlikely over that time.

Fund managers’ cash levels as a share of total assets fell to a three-year low, while allocation to stocks is at the highest since January 2022, according to the poll.

Higher inflation remains the biggest tail risk for investors, followed by geopolitics and a hard landing. The global survey was conducted from May 3 to 9, and canvassed 209 participants with $562 billion in assets under management.

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