Investor Outlook Brightens, if Only Slightly

Merrill Lynch's monthly survey of fund managers showed a big drop in the number of respondents worried about a global recession. Just 18 percent think we're already in a global recession, down from 24 percent last month. In April, 40 percent of managers said a recession is likely sometime in the next 12 months. Now just 29 percent expect one. But that's where the good news runs out, the survey says. Now managers are fretting about inflation.

The fact is that the vast majority of managers believe we are mired in a world of below-trend growth and above-trend inflation. Three months ago, 67% of the panel was bracing itself for stagflation; this month that percentage has risen to 85%. Moreover, even if the recession risks have lifted, widespread gloom about the corporate profits outlook lingers on.

That says nothing good for stocks, and 77 percent of those polled said expectations for corporate earnings are still too high.