Investors are in a “bullish holding pattern,” according to the March BofA Merrill Lynch fund manager survey.

Although macro conditions continue to trend higher, the survey found that investors had already begun to deploy cash. True, cash levels dropped to 4.8% in March from 4.9% in February, but the levels were still higher than the 10-year average of 4.5%.

The FMS cash rule, thus, is still in “buy” territory, BofA said, noting that average cash balances above 4.5% generate a contrarian buy signal and those below 3.5% a contrarian sell signal. 

“Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low,” Michael Hartnett, Merrill’s chief investment strategist, said in a statement.

“Policy is the key catalyst for the Icarus trade to fly higher in the coming months.”

An overall total of 200 panelists with $592 billion in assets under management participated in the mid-March survey.

A record net 34% of investors surveyed said equities were overvalued, the most in 17 years. Eighty-one percent identified the U.S. as the most overvalued region.

At the same time, 44% of fund managers said emerging markets were undervalued, and 23% said the same about eurozone equities.

A net 32% of investors also thought the U.S. dollar was overvalued, the highest proportion since June 2006. Long greenback was once again seen as the most crowded trade, cited by 39% of managers polled.

Thirty-six percent of investors pointed to higher interest rates as the catalyst most likely to end the eight-year equities bull market, while 21% said weaker earnings would be the cause.

Fear of protectionism as the likely catalyst fell sharply from 35% in February to 21% in March.

The survey found that yields remain too low to hurt stocks, as 67% of fund managers surveyed said an equity bear market would need 10-year Treasury yields of 3.5% to 4%.

Fifty-seven percent of investors said global profits would improve over the next 12 months, up from 55% in February and near a seven-year peak.

Expectations for faster global growth remained high at net 58%, down one percentage point from February. Chinese growth expectations rose to 11%, the highest level since 2013, according to Merrill.

Secular stagnation expectations (below-trend growth and inflation) fell to a five-and-a-half-year low of 34%.

A recent survey by The Economist found that “the green shoots of global recovery are real.”

A third of fund managers said upcoming European elections raising the danger of EU disintegration was the biggest tail risk, followed by 20% who cited a trade war and 18% a crash in global bond markets.

The much-anticipated first round of the French presidential election is scheduled for April 23. The runoff between the top two finishers will take place on May 7. German voters go to the polls in September.

“Investors are positive on European macro and see more value in equities than in the U.S., but there is a risk of complacency on French elections,” Ronan Carr, Merrill’s European equity strategist, said in the statement.

Just 10% of investors surveyed expected Congress to pass a tax reform bill before its summer recess begins in August, as Treasury Secretary Steven Mnuchin has promised.

Public company tax executives in a recent study said they expected tax reform under the Trump administration, but said congressional gridlock would be a major barrier.

— Check out Investor Optimism Climbs to 16-Year High: Wells Fargo/Gallup on ThinkAdvisor.