Global fund managers are now most concerned about a "disorderly" rise in bond yields, according to Bank of America's September survey of 170 managers overseeing $470 billion in assets. This concern, cited by 33% of managers (up from 27% in August), has overtaken fears of an AI trade bubble as the biggest "tail risk." The yield on the 10-year US Treasury note recently climbed above the psychologically significant 5% threshold, with current levels around 4.8% already moving into a "dangerous zone" for equity valuations relative to bonds, as higher yields can divert money from stocks and increase corporate borrowing costs.
Another significant risk is the soaring US national debt, which reached $39 trillion in March, representing 125% of GDP—more than double the 60% of economic output in 2007. Federal Reserve chair Jerome Powell has expressed concern that this debt is growing "substantially faster than the economy," calling it "unsustainable." While other advanced economies like Italy (137% of GDP) and Japan (over 230% of GDP) have higher debt-to-GDP ratios, the "inexorable rise upwards" of US debt could eventually lead investors to question the safe-haven status of the dollar and Treasury bonds, potentially triggering a crisis where "safe assets are no longer considered safe."
Market concentration, particularly in "market-cap weighted indices," poses a third key risk. The "Magnificent 7" tech stocks (Nvidia, Apple, Google, Microsoft, Meta, Amazon, and Tesla) alone hold a combined value of over $20 trillion and their dominance in major indices means a misstep by even one of these companies could significantly impact overall market returns. While these companies have shown strong earnings, the level of index concentration now surpasses that of the late 1990s dot-com era, raising prudence concerns for portfolios with such high exposure to a handful of stocks. Fathom Consulting estimates a 30% chance of the AI bubble popping next year, which would require AI-related sales to rise by $600 to $800 billion within two years to justify current valuations.
