Bearish Sentiment Spikes
US equities closed higher on Friday, with the S&P 500 and Nasdaq adding 1.6% each, while the Dow rose 601 points.
The market briefly pulled back after a tense exchange between President Donald Trump and Ukraine President Volodymyr Zelenskyy in the Oval Office, raising concerns over escalating geopolitical risks.
Economic data sent mixed signals: core PCE inflation eased to 3.7% as expected, but consumer spending unexpectedly dropped 0.2% in January.
Nvidia rose 0.6%, recovering from Thursday’s 8.5% drop, despite strong earnings.
Tesla gained 3.9%, snapping six consecutive days of losses amid concerns over CEO Elon Musk’s political stance affecting sales.
As a portfolio manager, I speak to many individual investors about their thoughts about the markets. Last week, there was an unusually high call volume from worried investors. According to the American Association of Individual Investors (AAII), bullish sentiment collapsed and bearish sentiment spiked.
Measures of broad consumer confidence have fallen in the past week. This has been seen across all age and wealth groups with worries centered on tariffs, inflation and future employment prospects. The University of Michigan Index of Consumer Sentiment for February shows inflation expectations over the next year at 4.3% primarily driven by tariff concerns.
Measures of business confidence have also fallen. The expected surge in mergers and acquisitions and initial public offerings following the election has not materialised. From a mid-January high to today, crude oil (WTI) has fallen by about 12%. The 10-year treasury rate has declined from 4.8% to a low of 4.2%. Falling oil prices and 10-year treasury rates are not typical of a strengthening economy.
The bullish breakouts to all-time highs we experienced in the major market indexes a fortnight ago have failed for the moment. The highest momentum stocks, including the Magnificent 7 (MAG 7), experienced large declines. On average, the MAG 7 is -8.0% year-to-date and -15.8% off their 2025 highs. The Equal Weighted S&P 500 (ticker RSP) is up 1.7% year-to-date and a modest -2.5% off the highs. Although a falling 10-year Treasury may not be a sign of strengthening/growth, lower yields are positive for borrowers!
Possibly the most bullish indicator for the stock market today is the bearish sentiment spike;
The last time the AAII bearish sentiment was this high was October 2022. The S&P 500 has appreciated 70% since then.
The last time the AAII bullish sentiment was this low was March 2023. The S&P 500 is up roughly 60% since then.
Sentiment, including fear and greed, are powerful drivers of investor behavior. The swings can be dramatic in short periods of time. To have long-term success in investing and avoid buying the highs and selling the lows, it is important to be disciplined (non-emotional) and allow the markets and other robust economic indicators to provide high-probability guidance.
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