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LONDON, May 16 (Reuters) - Investors have deepened their love affair with euro zone stocks and pushed allocations to two-year highs -- the third-highest on record -- while buoyant company earnings signal an extension of the global equity bull run, a survey showed on Tuesday.
The latest monthly survey by Bank of America Merrill Lynch showed money managers continued to swing away from U.S. equities into Europe.
They remained bullish on stocks overall, however, with more than half those polled -- the most in three years -- predicting that global profits would improve over the next 12 months.
"Sentiment bullish, but irrationality not yet visible despite all-time highs in credit and equity markets, robust global (earnings), benign French election result," BAML said in its poll of funds managing close to $650 billion.
While the majority of those surveyed expected the so-called Goldilocks scenario of high growth and low inflation, BAML was more bullish, predicting more upside to global stocks.
"You see Goldilocks, we see Icarus," it added.
A range of leading stock indices have hit record highs this week, including the MCSI Global index, S&P 500, German DAX and Britain's FTSE 100.
The poll found enthusiasm for euro zone stocks continuing to grow in May, with a net 59 percent of funds overweight versus 48 percent in April.
Euro zone stocks are approaching two-year highs, having rallied by about 10 percent so far this year on the back of a strong economic recovery, robust company earnings and voters' rejection of populist parties in elections.
A fifth of investors surveyed by BAML considered European share valuations excessive. In contrast, 82 percent viewed U.S. stocks as expensive, just off April's record high, while the Nasdaq technology index was deemed the most crowded trade.
While the net U.S. equity underweight position eased slightly to 17 percent in May, relative positioning versus the rest of the world was the lowest since November 2007 at minus 38 percent.
Overall, equity allocations rose in May to net 45 percent overweight, though funds trimmed underweight positions in bonds to a net 57 percent.
BAML reiterated that room remains for more gains on risky assets, based on the average 4.9 percent cash holding, which it said was too high to denote the "big top" in markets
In terms of potential pitfalls, Chinese credit tightening was feared most, displacing European Union disintegration as the biggest tail risk. (Reporting by Sujata Rao; Editing by Jamie McGeever and David Goodman)