News flow has been anything but quiet — but US equities have mostly been going sideways. And sideways markets have a habit of taking the edge off investor mood. In this case, they’ve helped deflate some of the developing froth we were seeing a few weeks ago.
Our Risk-on / Risk-off Sentiment Matters Aggregate now sits at the 62nd percentile — up a touch from last week, but still well below the 67th percentile (a 5-year high) we hit only a few weeks ago. The headline is unchanged: sentiment is clearly bullish — just a bit less frothy than at the peak.
One other change this week: we’ve added the ZEW Institute’s sector indicators to the heatmaps. ZEW has a poor reputation with many investors — and I think that’s mostly undeserved. The issue is category error: the ZEW questions are sentiment indicators, not leading indicators for the real economy. In our back-tests, ZEW sector sentiment has often behaved exactly how a good sentiment indicator should: sectors tend to outperform when experts are most bearish, and underperform when experts are most bullish.
Top 3 This Week
- Sentiment: Still bullish — but less frothy.
- AUD: Big rebound in sentiment alongside appreciation — now the most bullish in 9 years. Increasingly a candidate for vulnerability.
- Cyclicals: Sentiment keep grinding bullish — but not (yet) extreme.
Sentiment Overview
- Sideways markets have taken the edge off a number of indicators. The average Risk-On / Risk-Off Heatmap indicator sits at the 62nd percentile — still clearly bullish, but down from 67 a few weeks ago. Historically, this zone has been consistent with slightly below-average 12-month returns; sentiment becomes a clearer headwind above ~70.
- Big picture remains the same: clearly bullish, not yet “warning sign” territory — but the hurdle rate for further upside rises when the market is already leaning one way.
- ZEW sector indicators are now included in the sector heatmaps from this week onward. A deep dive on the indices will be on the website tomorrow.
- This month’s ZEW sector shifts reinforce the cyclical rotation we’ve been flagging: the biggest upgrades were Machinery and Steel & Metals; the biggest downgrade was Technology.
- The US exodus still shows up in ETF net issuance. The latest data shows a narrower gap between US domestic and world issuance, but the trend remains away from the US.
- Investor surveys are moving in a more bearish direction — but by very different degrees:
- AAII dropped into net bearish for the first time since November (around the 30th percentile)
- NAAIM ticked up, but only to around the 70th percentile
- Investors Intelligence has cooled a bit but remains hot at the 96th percentile
- The divergence is a reminder: the truth on sentiment usually sits between the extremes — and it’s why a broad indicator set matters.
- Margin debt has crept to another record level — but context matters. It’s about 2.2% of S&P 500 market cap, up from the 2024 low (1.6%) but still well below much of the 2010s. And margin debt has a weak track record as a timing signal.
- Extremes are skewing bullish:
- Bullish (>90th percentile): 15 indicators (vs 12 last week)
- Bearish (<10th percentile): 3 indicators (vs 6 last week)
Equity Sectors
- Most bullish: Technology
- Most bearish: Health Care
- Cyclical sentiment continues to grind higher. Industrials and Materials are now among the Top 4 most bullish sectors, and both moved higher again this week:
- Industrials: above the 2022 highs and now a 4-year high
- Materials: 5-year high
- If you missed it: last week’s Sentiment Ideas included a deep dive on Cyclicals. The punchline still holds — sentiment has risen sharply, but remains well below past peaks. If macro stays supportive, there’s no sentiment headwind to further rotation.
- Consumer Staples: early signs of life. CFTC positioning has improved from lows alongside better performance. Sentiment remains bearish overall — meaning no sentiment headwind if the improvement continues.
- Tech: regains the #1 sentiment spot (helped by rising CFTC positioning), but the broader downtrend in sentiment remains intact. At the 71st percentile, Tech still looks vulnerable.
- Utilities: still popular. Average indicator has climbed from the 40th percentile (Dec) to around the 70th. Performance is narrowing the gap, but it remains a tricky macro backdrop for a defensive leader.
Equity Regions
- Most bullish: Europe
- Most bearish: China
- EM: sentiment continues to drift lower despite strong performance — a constructive setup, suggesting expectations haven’t run too far ahead of the rally.
- China: sentiment is weaker than broader EM, matching weaker performance. The split is visible in buy-side data and in ZEW China equity sentiment, which dropped into net bearish for the first time in over a year.
- US: sentiment is best described as neutral — well below late-2024 highs, but well above post–Liberation Day lows. ETF net issuance suggests flows are preferring other regions.
- Japan: strong performance, but sentiment remains slightly bearish across most indicators. That’s a positive in one sense — it suggests the rally hasn’t created excessive expectations, and leaves room for domestic investors to join what has so far been a foreign-led move.
Fixed Income
- Most bullish: Emerging Market Debt
- Most bearish: US High Yield