Investment managers remain generally optimistic regarding the U.S. economy but are reassessing U.S. equity valuations, according to the quarterly Investment Manager Survey by Northern Trust Asset Management.

After a more than 10% gain in U.S. equities following the November election of President Trump and a Republican-controlled Congress, more than half of those surveyed (59%) said an inability to move key legislation forward is the biggest threat to the rally. A geopolitical incident, trade policy concerns and equity market valuations are considered the next most likely risks to the U.S. market, according to the survey of approximately 100 investment firms taken March 14 to 27, 2017.

“Low interest rates, slow but steady economic growth and improving corporate earnings along with a Republican led pro-growth policy agenda have bolstered markets,” says Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust Asset Management. “Our survey respondents, however, view U.S. equity valuations as getting less attractive and see a risk to the markets trajectory if the administration cannot enact legislation that supports improved economic growth.”

More than half (51%) of managers believe U.S. equities are overvalued, the highest percentage in the survey’s history and a significant increase from the previous quarter, when 39% saw U.S stocks as overvalued. Valuations held up better in other markets, 37% of managers believe equities in Japan are undervalued, in line with last quarter; 80% believe European equities are undervalued or fairly valued, down slightly from 89% the previous quarter. Just less than half (48%) see emerging market equities as undervalued, compared to 61% the previous quarter.

Managers are most bullish on emerging market equities, followed by non-U.S. developed markets. TIPS jumped to third among asset classes, up from sixth last quarter. Looking at sectors, managers were most bullish on the information technology sector, which rose from fifth place previously. Financials dropped from first to second place.

Looking at the bond market, 52% of managers believe U.S. high yield is overvalued following strong performance in 2016, but credit spreads are likely to remain at historically lower spreads over Treasuries. Nearly one-quarter (23%) see U.S. high yield as overvalued and expect spreads to widen soon, while another 22% believe U.S. high yield is fully but fairly valued given the low interest rate environment.

Eight of ten respondents (79%) expect interest rates will increase over the next three months, up slightly from the previous quarter and the highest reading on this measure since Northern Trust’s survey began in the third quarter of 2008. Most investment managers, 63%, expect inflation will also rise over the next six months—down from 78% with that view last quarter.

In the quarterly ranking of risks to global equity markets, trade policy remained in the top spot, with geopolitical risk ranked second, rising from third last quarter, and a rise in interest rates ranked third, down from second in the previous survey. Trade policy was added to the list of potential risks to equities in the fourth quarter after it became a central issue in the presidential election.

While 82% of investment managers report portfolio cash levels in line with historic norms, a sizeable minority are somewhat defensive in their positioning: 17% have cash levels above normal levels. This is down from a historic high of 23% in the third quarter of 2016, but still above the historic average of 13% of manager holding higher cash levels.

For its survey, Northern Trust polls investment firms that participate in its multi-manager investment programs and funds. The select group of respondents includes fixed income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock picking strategies. The survey is conducted quarterly so that Northern Trust and participating managers can examine trends in attitudes and allocations. The full Investment Manager Survey Report and a video about survey highlights can be found at www.northerntrust.com/managersurvey.