US stocks have been fluctuating near record highs for nearly four months, with each rally quickly being erased by a wave of selling, as seen in Monday's trading session. This persistent back-and-forth has led to a notable shift in a closely watched investor sentiment survey, where bearish respondents have outnumbered bullish ones for the first time since last November. Parag Thatte, a strategist at Deutsche Bank, noted that the bank's proprietary measure of equity positioning has now fallen into underweight territory. For persistently optimistic US stock bulls, the combination of these two bearish signals is being interpreted as a contrarian buy signal. Historically, such conditions have often preceded a rebound in stock buying. This also suggests that the current rally is broadening, with investors continuing to shift away from large-cap technology stocks toward higher-risk small-cap stocks and emerging markets.
Ed Clissold, Chief US Strategist at Ned Davis Research, stated that the US market is currently displaying a rare combination of "pessimistic sentiment alongside broad-based upward momentum." He told clients on Monday that this environment is "generally favorable" for US equities and is a key reason for maintaining an overweight position. The S&P 500 is currently down 0.8% from its record high set on October 28th of last year, after which the "Magnificent Seven" stocks experienced a sustained pullback in November. The index last closed at a record high four weeks ago and has since declined 2% from that level. In contrast, the Russell 2000 small-cap index and the S&P 500 Equal Weight Index have both gained at least 5.2% year-to-date. Capital is flowing away from mega-cap tech stocks into smaller, riskier individual stocks, as well as into sectors like energy, materials, and consumer staples.
Despite this, Andrew Greenebaum, a Senior Vice President at Jefferies, wrote in a report that "market sentiment and risk exposure have deteriorated sharply." He added, "We are hardly seeing extreme 'buying at any cost' signals—and with the major indices not even in a correction, it's uncertain if such signals will even appear." Beyond pessimistic sentiment as a classic contrarian indicator, bulls have more solid reasons for optimism. The most critical factor is corporate earnings: compiled data shows that S&P 500 companies reported a 13% year-over-year profit growth in the fourth quarter, significantly exceeding the prior expectation of less than 9%. Although the American Association of Individual Investors (AAII) survey results are clearly tilted toward pessimism, it is widely believed that, similar to other sentiment surveys like consumer confidence, respondents often "say one thing and do another."
Matt Miskin, Co-Chief Investment Strategist at Manulife John Hancock Investments, commented, "They may say they are 'less optimistic,' but their actions are honest—they are increasing exposure to risk assets." He pointed out that a closer look at market internals shows investors are moving into higher-risk individual stocks and increasing bullish bets through instruments like leveraged single-stock ETFs. Retail investors have consistently been "buying the dip," and with notable success. Greenebaum also highlighted several positive signals from the current earnings season: approximately half of S&P 500 companies have raised their guidance, the highest proportion since the second quarter of 2021. "There's nothing wrong with these businesses; earnings are still growing. The market is just temporarily reluctant to price them accordingly. I believe this will change over the medium term. I would be very surprised if US stocks don't gradually move higher," he stated.
Specifically, he mentioned that the Ned Davis Research sentiment indicator fell into pessimistic territory on February 11th; even as capital rotates from large-cap tech to value and small/mid-cap stocks, over 62% of S&P 500 constituents remain above their 200-day moving averages; and the S&P 500 advance-decline line is at historically high levels. "These signals are more characteristic of a mature bull market than the start of a new major rally, but they are certainly not indicative of an impending crash," he added. Of course, investors still face multiple uncertainties: following the US Supreme Court's rejection of a Trump-era tariff policy, related measures were urgently revised last Friday afternoon, adding to policy confusion; ongoing concerns about the impact of AI tools on revenues across various industries are also weighing on the market.
Dirk Willer, Head of Macro Strategy and Asset Allocation at Citi, recently noted that the S&P 500 is currently "oscillating within a messy range," and the bank's sentiment indicators also suggest "a need for tactical caution." Nonetheless, Citi reaffirmed its overweight stance on US equities while reducing its allocation to tech stocks and shifting 50% of its holdings into small-cap stocks. "Our equity strategy team believes there is still room for further market rotation and broadening," the bank stated.
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