Is the bear market over? Wall Street isn't so sure

The S&P 500 has surged 32% from its March 23 lows. The Nasdaq is now just 6% away from setting record highs.

That breathtaking rebound suggests many investors are betting the ferocious response from the federal government will set the stage for a V-shaped economic recovery.

President Donald Trump shares that optimism. "The market is up very big, and I think you're going to have a 'V,'" Trump told reporters Monday.

Sophisticated investors, though, are far more cautious about the challenges ahead. Just 10% of fund managers expect a V-shaped recovery, according to a survey released by Bank of America on Tuesday.

Three-quarters of those fund managers expect a more modest U-shaped recovery -- where the economy stagnates for a period of time before gradually recovering -- or even a dreaded W-shaped recovery, which entails a rapid rebound followed by a second serious decline and an eventual rebound.

That relative pessimism explains why only 25% of fund managers polled by Bank of America believe that this is a new bull market. In fact, more than two-thirds think this is just a bear market rally, or "dead-cat bounce" in the midst of a longer-term bear market.

These sophisticated investors are sitting on lots of cash. Cash balances for the funds in the survey were at 5.7% in May, well above the 10-year average of 4.7% and the pre-crisis level of 4% in February.

"Investors [are] still extremely bearish," Bank of America strategists wrote in the report.

'It will take a long time'

The biggest fear is that a second wave of coronavirus infections will derail the economy, the survey found. And the second biggest "tail risk" listed was that the economy will suffer from "permanently high unemployment."

Randall Kroszner, who served as a top Federal Reserve official during the 2008 financial crisis, thinks the economic optimism may be misplaced.

"We went down like a V, but we're not going to come up like a V," Kroszner told CNN Business. "It will take a long time for the economy to fully recover because there are fundamental changes that are occurring. The ways people consume, travel and work are going to change."

Kroszner, now a professor at the University of Chicago Booth School of Business, pushed back against the idea that central banks and national governments can quickly restore the economy to pre-crisis levels.

"It's not going to be possible to go back to where we were in February or March," he said.

Jerome Powell, the chairman of the Federal Reserve, is optimistic on America's ability to recover in the long run. Yet even he is trying to dial back expectations of a rapid recovery.

When asked if he anticipates a V-shaped recovery, Powell told "60 Minutes" that "it's very plausible that the economy will take some time to gather momentum...And that would imply that, at the beginning at least, the recovery would take some time to get moving, to gain steam."

Vaccine hopes fire up markets

Contrast that with the near-euphoria on Wall Street.

On March 23, the Nasdaq had plummeted a stunning 30% from its record high, set in February. Today, it's just 6% away from that all-time high of 9,817.

Market valuations have returned to historically-rich levels, suggesting the market is priced for perfection. The CNN Business Fear & Greed Index of market sentiment has clawed its way out of "fear" mode and is now safely in "neutral" territory. The next stop could be "greed."

A major driver of the market recovery is the apparent progress on the healthcare front.

The Dow spiked 912 points, or 3.9%, on Monday after biotech company Moderna announced positive early findings for an experimental vaccine to fight coronavirus.

A Phase 1 trial showed that participants developed antibodies against the virus. If future studies go well, a vaccine could be available to the public as early as January

"Moderna's vaccine obviously could be a gamechanger depending on how well it does during Phases 2 and 3," Ed Yardeni, president of investment advisory Yardeni Research, wrote in a note to clients Tuesday.

A vaccine breakthrough is the most likely catalyst for a V-shaped recovery, the Bank of America survey of fund managers found.

"It may very well be the first vaccine ever to determine the shape of an economic recovery," Yardeni added.

Is the worst over?

Still, what's unusual this time is that unlike during previous bear markets, the S&P 500 has not re-tested its March 23 lows. The Bank of America survey suggests that sophisticated investors believe it may still be coming.

Sam Stovall, chief investment strategist at CFRA Research, said that hasn't happened yet because investors are so relieved by the federal government's fast and fierce actions.

"What's different is the speed and magnitude of the response by both the Fed and Congress," Stovall said. "Unlike 2008, 2000, 1973 and other bear markets, we have a Fed that is very much ahead of the curve."

Congress and the White House quickly enacted a record-setting stimulus package that arms households, small businesses and Corporate America with cash during the shutdown.

The Fed slashed interest rates to zero, promised to buy an unlimited amount of bonds and set up a flurry of emergency lending programs, including one that will direct the purchase of corporate bonds.

And the Fed is fully prepared to go even further. "There's really no limit to what we can do with these lending programs that we have," Powell told "60 Minutes."

That is music to the ears of investors who have been trained to buy stocks and junk bonds when the Fed is pumping trillions of dollars into the financial system.

But tucked into a 78-page Fed report released Friday evening was also a warning.

"Asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge," the Fed's financial stability report said.

In other words, if a V-shaped recovery proves elusive, the stock market could be in store for a rocky ride.