Fund managers continue to be negative about U.S. stocks, but are still generally positive about equities over bonds, according to the latest Merrill Lynch Fund Manager Survey released today.

“The U.S. picture is certainly poor, but institutional investors are not ready to throw the baby out with the bathwater just yet,” said David Bowers, Merrill Lynch Chief Global Investment Strategist, who oversees the survey. “While investor perceptions of American markets continue to get worse, the expectations for equities as a whole have held up much better than might have been expected from recent market action.”

Despite another difficult month for world stock markets, positive responses from the survey of 279 institutional investors resulted in an increase in the Merrill Lynch Stock Market Conditions Indicator. The indicator rose from 12.3 in June to 15.6 in July, its highest level since November 2001, thanks to an improvement in equity valuations. (The ML SMC indicator provides a summary measure of how investors feel about profits, interest rates, equity valuations and overall market sentiment.)

74% of those surveyed by Merrill Lynch said they expect equities to be higher a year from now. In fact, 37% said they are still hopeful for double-digit returns from world markets in a year’s time.

But survey respondents are cautious about the U.S. 36% of those polled see the U.S. as having the worst corporate profits’ outlook. 34% say the country has the worst quality of earnings in terms of volatility, predictability and transparency. And 57% of those polled still believe that U.S. equities remain relatively the most expensive in the world.

Despite the negativity on U.S. equities, two thirds of the fund managers worldwide said they think it is unlikely that bonds will do better than equities over the coming year, according to the survey. Globally stocks have underperformed bonds by almost 25% in the past three months, Bowers said, so it is not surprising to see that the net balance of asset allocators overweight equities has come down sharply this month. “While the pro-equity stance has reduced, 48% of asset allocators remain overweight in equities, while 49% are still underweight bonds.”

Overall, fund managers continue to shift emphasis away from the U.S. and toward the Eurozone and Global Emerging Markets, according to the survey. The survey was conducted from July 4 to 11 with institutional investors who manage more than US$632 billion in funds worldwide.