Before I get too far, let me address those who are looking for our Weekly Income Report, which typically comes out on Monday. Emily, the editor of that edition, is heading to this week’s Investor’s Blueprint Live event and was unavailable. When I was asked to fill in, I looked at last week’s closed trades and decided there weren’t enough to warrant an article write-up. I certainly couldn’t do it the justice that Emily does, so I wrote about something different and I hope you enjoy it just the same.
Investors Are Cautious—And That Might Be a Good Thing
Typically, record-breaking market highs spark optimism. Investors pile in, expecting continued growth, and sentiment indicators reflect broad bullishness. But right now, something strange is happening: sentiment is cooling off instead of heating up. According to the latest AAII Investor Sentiment Survey, bullish sentiment has plunged to just 29.2%—far below the historical average of 37.5% and the lowest since November 2023. At the same time, bearish sentiment has climbed to 47.3%.
What’s behind this shift? Uncertainty. Concerns over tariffs, ongoing trade tensions, and geopolitical risks are weighing on investors. Even though the market itself remains strong, the emotional response to economic and political headlines is creating fear. The CNN Fear/Greed Index reflects this, hovering at 35%, above the “extreme fear” threshold, and square in the middle of the “fear” threshold despite the S&P 500 sitting at all-time highs.
Wall of Worry or Warning Sign?
From a contrarian perspective, this kind of investor pessimism can actually be bullish. When retail investors turn cautious—even as markets continue higher—it suggests that there’s room for the rally to run. Historically, high levels of fear have often preceded further gains as stocks “climb the wall of worry.” Simply put, when too many people expect the worst, markets often surprise in the opposite direction.
The Investors Intelligence Advisor Sentiment Survey confirms this trend. While financial advisors still lean bullish, their optimism has faded from the extreme highs of late 2024. With the Bulls/Bears spread now at 30.3%, we are far from levels that would indicate market complacency. That means sentiment isn’t overheating—a positive for the sustainability of the rally. However, all bullish readings are below historical averages while bearish readings have been above.
The Real Risk: If Headline Volatility Persists, Behavior Could Change
Although negative sentiment might not immediately threaten the stock market’s uptrend, there’s a tipping point. If fear-driven headlines persist, investor anxiety could translate into real economic consequences. When people start delaying investments, cutting back on spending, or avoiding risk altogether, economic growth can slow.
That’s one reason we saw companies like Wal-Mart (WMT) fall off a cliff this past week.
We’ve seen this before. Prolonged periods of market uncertainty have historically led to declines in business investments and consumer spending. If current geopolitical tensions and trade uncertainties aren’t resolved soon, the ongoing anxiety could spill into the broader economy.
What to Watch in the Weeks Ahead
The key question is whether fear will fade or escalate in the coming weeks. Here are some critical indicators to track:
- Sentiment Surveys – If investor sentiment continues to deteriorate, we could see weaker market participation, potentially slowing the rally.
- Economic Data – Consumer spending, business investment, and employment numbers will reveal whether uncertainty is impacting real economic behavior.
- Headline Volatility: Watch for any shifts in geopolitical tensions or trade policies. Reducing uncertainty could quickly restore confidence and fuel further gains.
Bottom Line: Cautious Sentiment Is a Short-Term Tailwind, but Risks Remain
For now, the stock market is showing resilience in the face of negative sentiment, and that’s a good thing. A market climbing despite fear suggests underlying strength, and as long as economic fundamentals hold up, the rally could continue.
However, if the constant barrage of negative headlines continues to weigh on sentiment, it could eventually start affecting real-world economic decisions. That’s why it’s crucial to monitor sentiment trends and broader economic indicators.
Investors should remain aware but not fearful. Sentiment data suggests there’s still room for this rally to run—but only if the fear-driven narrative doesn’t turn into actual economic headwinds.
Stay informed, and be ready to adjust as market conditions evolve.
We may be dark over the next few days during the conference, but we will be back soon with what you need to know about current market conditions and what that means for you.
