After a rollercoaster March and April, it feels a bit calmer in markets. Some welcome respite.
There is still a lively debate about whether markets are complacent or efficient in pricing the geopolitical risk from the Middle East.
I lean towards the efficient-market side.
That does not mean markets are saying the war is over. It means investors currently do not expect it to have a material impact on future S&P 500 profits.
Geopolitical shocks usually create their biggest market impact early on, when uncertainty is highest. Investors do not yet know how much the event will affect profits, inflation, oil prices, policy or risk appetite. So they demand a bigger discount.
But as time passes, the uncertainty often falls faster than the conflict itself. Investors adapt. The shock value fades. The range of likely economic outcomes narrows. Unless there is fresh escalation, some of the geopolitical risk premium gets priced out.
We have seen this before. Ukraine is the most recent example. Equities sold off sharply after Russia’s full-scale invasion, but recovered those losses within a month, even though the war continued and still has no clear end.
The same logic applies today.
The rebound in equities is not a moral judgement. It is not a view on whether the situation is good, bad or resolved. Equity markets are simply discounting future cash flows. A war matters for equity prices only if it changes those future cash flows, or what investors are willing to pay for them.
My baseline is simple: the more intensely and widely a market risk is debated, the less likely it is to be significantly mispriced. That does not mean the risk is gone. It does mean the edge in spotting an obvious, tradeable mispricing is probably smaller than the debate suggests.
That holding pattern is visible in our sentiment data too.
Our Quick Risk-on / Risk-off aggregate, which uses only daily and weekly inputs, has come off the previous week’s highs. At the 59th percentile, it shows investors are net bullish, but still well below the pre-war peaks — and below the levels that have historically been followed by below-average equity returns at a high hit rate.
The slower-moving Risk-on / Risk-off aggregate, which includes more monthly inputs, tells a similar story. The average indicator is also at the 59th percentile.
The message: sentiment is slightly bullish, but not stretched enough to send a strong warning signal.
Top 3 This Week
- Sentiment: Slightly net bullish, but far from yellow flags.
- Tech: The rally has taken sentiment back to the 98th percentile — close to November’s peak bullishness. Vulnerabilities are building again.
- Copper: Tracking Tech. Sentiment is at the 87th percentile. This looks like an AI trade, not just a cyclical trade.
Sentiment Overview
- Weekly surveys were all up — some sharply.
- AAII Bull-Bear jumped to +12% net bullish, the highest level since before the war. But it remains far from historic extremes.
- Investors Intelligence Bull-Bear rose for the second week in a row. At +17% net bullish, it is still below its long-term historical average.
- NAAIM Exposure rebounded the most. It is back to the 90th percentile, the highest since mid-January.
- The Geopolitical Risk Index fell below 200 last week. That reflects geopolitical risk declining in line with the historical pattern. This is normal!
- But the bigger-picture point still matters: we remain in a world of elevated geopolitical risk. The 1-year average GPR has been above its long-term average of 100 since 2022 — before “Trump 2.0” — and continues to trend higher, closing in on early-1990s peaks.
- Net Call Volumes have eased a little from last week’s extreme levels, but remain above the 90th percentile across most categories, and close to record highs in several areas. Historically, these have been high-quality contrarian sentiment indicators.
- The SF Fed Daily News Sentiment Index has also started to tick higher. The move is much smaller than the GPR decline, but it is consistent with a modest easing in broader stress in news coverage — even if worries about the state of the world remain elevated.
- Extremes are heavily skewing towards bullish sentiment:
- Bullish (>90th percentile): 17 indicators (16 last week)
- Bearish (<10th percentile): 4 indicators and only geopolitical risk and policy uncertainty indicators (unchanged)
Equity Sectors
- Most bullish: Technology
- Most bearish: Health Care