Geopolitics is back — if it ever really went away. It’s difficult (borderline impossible) to have an edge in predicting geopolitical outcomes, which is why I default to “prepare, don’t predict.” But in markets, the practical version of that motto is often: revert to sentiment analysis and be willing to be contrarian.
When risk assets sell off on geopolitical headlines, markets often embed a geopolitical risk premium — and that premium tends to mean-revert. The Geopolitical Risk Index (GPR) is a good way to track it, and it has a strong contrarian track record: when geopolitical stress spikes, “buy the geopolitical dip” has historically been good advice, especially over short horizons. I also like a simple second filter: how likely is this event to hit S&P 500 profits? If the answer is “extremely unlikely” (and it usually is), that’s another nudge toward leaning into the risk premium rather than chasing the fear.
This weekend’s move in risky assets should take a bit more froth off what was bullish-but-not-extreme sentiment. We’ll see over the next few days whether more indicators roll over — but Monday’s open looked more like a modest cooling than the start of a full shift back to bearishness.
As things stand, our Risk-on / Risk-off Sentiment Matters Aggregate sits at the 62nd percentile — unchanged from last week and still well below the 67th percentile (a 5-year high) we hit a few weeks ago. Headline unchanged: sentiment is clearly bullish — just a bit less frothy than at the peak.
Top 3 This Week
- Sentiment: Less bullish — but still far from bearish.
- Japan: Strong performance, but sentiment has only ticked up to neutral.
- Consumer Staples: One of the biggest movers recently. CFTC positioning is leading, but overall sentiment is still only at the 35th percentile.
Sentiment Overview
- Big picture remains the same: clearly bullish, not yet “warning sign” territory.
- Geopolitical events take a couple of days to filter through the broader indicator set. The first reaction looks like a modest decline in sentiment, not a wholesale shift into bearishness.
- The best short-term measure of the geopolitical risk premium is the Geopolitical Risk Index (GPR). It tracks how often major international newspapers mention terms related to wars, threats, or terrorism (daily data, published weekly on Monday afternoon, so today). When the GPR rises above 300, forward 1-month equity returns have averaged 4.75% and were above average 85% of the time. The signal weakens as you push beyond ~3 months.
- AAII Asset Allocation Survey: cash allocations fell again — now the lowest in over four years. At 14.2%, it’s creeping toward the historical “sell threshold” around ~14%; below that, average 12-month equity returns have been around 0%, with below-average returns ~74% of the time. Equity allocations dipped slightly and bond allocations rose, but neither is close to historical extremes.
- US Economic Policy Uncertainty: increased on the month but has been stable at a high level for six months. Historically, that’s still been consistent with above-average equity returns.
- Survey disagreement: looks huge on the surface — AAII Bull-Bear (23rd percentile), NAAIM (55th), Investors Intelligence (91st). But look under the hood and they’re all broadly consistent with average forward equity returns — more agreement than it seems.
- Extremes are skewing bullish:
- Bullish (>90th percentile): 14 indicators (vs 15 last week)
- Bearish (<10th percentile): 4 indicators (vs 3 last week)
Equity Sectors
- Most bullish: Utilities
- Most bearish: Health Care
- Cyclical sentiment continues to grind higher. Industrials and Materials are among the top four most bullish sectors, with Energy right behind:
- Industrials: above the 2022 highs, now a 5-year high
- Materials: 5-year high
- Cyclicals sentiment has risen sharply but remains well below past peaks. If macro stays supportive, there’s no sentiment headwind to further rotation.