U.S. Stocks Keep Setting Records as Bearish Sentiment May Leave Room for More Gains
U.S. markets are at historic highs, but concerns ranging from geopolitics and inflation to divisions within the Federal Reserve are curbing investors’ appetite for risk. That may be precisely what this rally needs to continue. New money is flowing into passive investment vehicles at a slower pace. Week after week, sentiment data consistently show that market bears outnumber bulls. Equity positioning also does not fully reflect the strength of corporate earnings growth. Taken together, these indicators may suggest that a more measured mood is prevailing among investors. After the S&P 500 rose 22% since the end of March, that mindset could be a constructive development. With economic and corporate fundamentals still solid, investor caution may mean that more buying power remains on the sidelines. “This is arguably the best earnings environment in economic history,” Mark Hackett, Nationwide’s chief market strategist, said on a call. “You have to be very creative to come up with reasons to be bearish.” The S&P 500 broke above 7,700 for the first time last week and continued setting records. Investors were encouraged by the second-quarter earnings season. Data showed that profits for companies in the index grew 32% in the three months through June, a pace exceeded only during the initial stages following major economic downturns. Large asset managers have been slower to respond to the trend. Data compiled by Deutsche Bank show that large-cap positioning is currently at the 87th percentile of observations from the past 10 years. Strategists at the bank, including Parag Thatte, wrote in a report to clients that the reading typically corresponds to an earnings growth rate of about 15%, well below the current level. Another set of data from the American Association of Individual Investors showed that bears outnumbered bulls in 20 of the past 25 weeks. A streak of that duration was last seen after U.S. President Donald Trump introduced global tariff measures. Data compiled by Baird Strategas showed that investors put about $31 billion into U.S. stock ETFs last week, below the pace of inflows seen when the market last reached a record high in early June. Of course, it is not difficult to understand why skeptics continue to hold their view. The threat of higher interest rates hangs over corporate earnings, while the conflict in the Middle East and the U.S. midterm elections in November remain unpredictable variables. A Bank of America sentiment survey showed that strategists recommended allocating about 56% of portfolios to stocks, below the 70% recorded from 1999 through 2007. “Equity positioning is not as extreme as it was in some previous cycles,” Jill Carey Hall, Bank of America’s equity and quantitative strategist, said on a call. If history is a guide, the disconnect between investor sentiment and market fundamentals could create buying opportunities. Strategists at 22V Research pointed to a gap between the American Association of Individual Investors’ bull-bear index and the firm’s U.S. Economic Data Index, which tracks the release of overall economic data. The current size of that gap suggests that the S&P 500 could rise 1.6% over the next month, 5.1% over three months and 7.8% over six months. “Relative to the economic data, the current investor-sentiment reading implies that returns will be above normal,” Dennis DeBusschere, 22V Research’s president and chief market strategist, wrote in a report to clients. “Investors have had too many reasons to question the equity bull market over the past few weeks,” said Alastair Pinder, HSBC’s global equity strategist. “We think those concerns are increasingly reflected in market pricing, while the market continues to underestimate the improvement in fundamentals.”
New money is flowing into passive investment vehicles at a slower pace. Week after week, sentiment data consistently show that market bears outnumber bulls. Equity positioning also does not fully reflect the strength of corporate earnings growth.
Taken together, these indicators may suggest that a more measured mood is prevailing among investors. After the S&P 500 rose 22% since the end of March, that mindset could be a constructive development. With economic and corporate fundamentals still solid, investor caution may mean that more buying power remains on the sidelines.
“This is arguably the best earnings environment in economic history,” Mark Hackett, Nationwide’s chief market strategist, said on a call. “You have to be very creative to come up with reasons to be bearish.”
The S&P 500 broke above 7,700 for the first time last week and continued setting records. Investors were encouraged by the second-quarter earnings season. Data showed that profits for companies in the index grew 32% in the three months through June, a pace exceeded only during the initial stages following major economic downturns.
Large asset managers have been slower to respond to the trend. Data compiled by Deutsche Bank show that large-cap positioning is currently at the 87th percentile of observations from the past 10 years. Strategists at the bank, including Parag Thatte, wrote in a report to clients that the reading typically corresponds to an earnings growth rate of about 15%, well below the current level.
Another set of data from the American Association of Individual Investors showed that bears outnumbered bulls in 20 of the past 25 weeks. A streak of that duration was last seen after U.S. President Donald Trump introduced global tariff measures. Data compiled by Baird Strategas showed that investors put about $31 billion into U.S. stock ETFs last week, below the pace of inflows seen when the market last reached a record high in early June.
Of course, it is not difficult to understand why skeptics continue to hold their view. The threat of higher interest rates hangs over corporate earnings, while the conflict in the Middle East and the U.S. midterm elections in November remain unpredictable variables. A Bank of America sentiment survey showed that strategists recommended allocating about 56% of portfolios to stocks, below the 70% recorded from 1999 through 2007.
“Equity positioning is not as extreme as it was in some previous cycles,” Jill Carey Hall, Bank of America’s equity and quantitative strategist, said on a call.
If history is a guide, the disconnect between investor sentiment and market fundamentals could create buying opportunities. Strategists at 22V Research pointed to a gap between the American Association of Individual Investors’ bull-bear index and the firm’s U.S. Economic Data Index, which tracks the release of overall economic data. The current size of that gap suggests that the S&P 500 could rise 1.6% over the next month, 5.1% over three months and 7.8% over six months.
“Relative to the economic data, the current investor-sentiment reading implies that returns will be above normal,” Dennis DeBusschere, 22V Research’s president and chief market strategist, wrote in a report to clients.
“Investors have had too many reasons to question the equity bull market over the past few weeks,” said Alastair Pinder, HSBC’s global equity strategist. “We think those concerns are increasingly reflected in market pricing, while the market continues to underestimate the improvement in fundamentals.”