Professional investors see the stock market higher than it should be and likely to lose one of its key supports, according to a closely watched sentiment gauge.
A net 46 percent of respondents to the latest Bank of America Merrill Lynch Fund Manager Survey consider stocks "overvalued," the biggest gap ever recorded in the survey, which dates to the mid-1990s.
At the same time, investors are lowering their expectations for corporate earnings, which have been strong this year and helped give the bull market fresh legs. A net 33 percent believe profits will improve over the next 12 months, which is down 25 percentage points in 2017 and at the lowest level since November 2015.
Corporate America is coming off a strongly positive earnings season, with bottom-line profits on track to grow 10.2 percent as 73 percent of S&P 500 companies topped analyst expectations, according to FactSet. That comes after first-quarter growth of nearly 14 percent.
The current outlook is for respective 5.2 percent and 11.2 percent gains in the final two quarters of the year. However, the earnings beats aren't doing much good — companies that are topping estimates actually have seen slight price declines in the ensuing days after reporting, something that hasn't happened in six years.
"Investors' expectations of corporate profits have taken an ominous turn this year, which is a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones," Michael Hartnett, chief investment strategist at BofAML, said in a statement "Further deterioration is likely to cause risk-off trades."
The turn in fund manager sentiment comes amid a bevy of warnings from big market names that there's danger ahead.