Investor confidence continues to crumble as expectations for corporate profit growth drop, according to BofA Merrill Lynch’s latest fund manager survey.

The firm reports that growth expectations are down in July, and that a “severely deteriorating outlook for profits” is driving the fall in confidence. Its latest survey found that a net 38% of investors say corporate profits will worsen in the coming 12 months — compared to just 19% a month ago. This latest fall in confidence echoes the drop that occurred in the summer of 2011 as the sovereign debt crisis took shape, it notes.

Despite the drop in confidence and profit expectations, both the broader macroeconomic outlook and risk appetites have stabilized, Merrill notes. It says that a net 13% expects the world economy to weaken in the coming year, which represents a drop of just two percentage points after a fall of 26 points from May to June. And, investors reduced average cash holdings in their portfolios to under 5%, it reports.

“July’s survey highlights that corporate profit expectations have to catch up with the downgrade in the economic outlook we have seen the past two months,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.

The survey also found that investors’ fears about risk in the eurozone has shifted from the countries on the periphery to the countries that form Europe’s core. The proportion of respondents who see the risk of a negative shock in Germany’s economy has more than tripled to 32% from 10% in June, it says. And, concern about France has risen, too, with a majority of investors (55%) believing the French economy could present a negative surprise this year.

At the same time, fears that Spain or Portugal could spring a negative surprise have fallen, and expectations of good news from Ireland are growing, it says. However, confidence in Greece has fallen further, with the proportion of investors saying Greece will avoid exiting the euro sliding to 37% from 44% last month.

Most investors expect further quantitative easing, but few expect this to happen in the third quarter, the survey notes.

“Rising equity prices have failed to lift investor gloom and we still see a quarter of investors expecting a global recession while hopes for further policy easing have been delayed,” added Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research.

In terms of asset allocation, the survey found that investors have scaled back their technology holdings. And, U.S. equities have declined in popularity too. At the same time, asset allocators have reduced their underweights in eurozone, UK and Japanese equities. It also says that investors see gold as fairly valued and oil as undervalued.

An overall total of 261 panelists with US$708 billion of assets under management participated in the survey from July 6 to 12.