Equities ended the week on a weaker note, but investor sentiment had already been fading throughout the week.
If you only look at the S&P 500, which is now 6.5% above its pre-Iran war high, you might think investors are euphoric.
But a broader look at the sentiment data shows a much more subdued picture.
Both of our Risk-On / Risk-Off aggregates — one based only on daily and weekly inputs, the other also including slower-moving monthly indicators — bounced back quickly during the late-March rally. At the peak, the average indicator was around its 60th percentile.
Over the past week and a half, that has dropped back to the 52nd percentile. In other words: slightly north of neutral.
Historically, this has been consistent with average equity returns over the next 6–12 months, with above-average returns around half of the time.
So what has driven the decline?
The move has been fairly broad. Across our aggregates, 16 indicators shifted in a more bullish direction over the past two weeks, but 40 shifted in a more bearish direction.
The indicators that have moved in a bearish sentiment direction include fund flows, put/call ratios, investor surveys and implied volatility.
Another explanation is the narrow nature of the equity rally.
The S&P 500’s new highs are more reflective of excitement around Tech and AI than a broader improvement in risk appetite. Other indices that are less Tech-heavy and more exposed to the global economic cycle, such as EuroStoxx, have not shown the same strength.
This is why an evidence-based approach to sentiment analysis starts with a framework that considers the breadth and reliability of multiple indicators, rather than relying on a few indicators that confirm your bias.
It is very easy to fall into the cherry-picking trap — either by following your gut feeling or by relying on one favourite sentiment indicator.
That is why at Sentiment Matters, we use and back-test more than 500 sentiment indicators across asset classes to provide a more balanced, data-driven view of where investor sentiment really stands.
Bottom line: Sentiment is not as bullish as the S&P 500 price level might suggest. Most indicators have cooled from their rally peaks. Bullishness is as narrow as the rally itself and remains concentrated in specific parts of the market — especially Tech and AI.
Top 3 This Week
1. Sentiment: not as bullish as you think
Broad investor sentiment has shifted less bullish again. Tech remains the clear exception.
2. Industrials: one to watch
Industrials sentiment has continued to fall. Having peaked at the 70th percentile before the war, it is now down to the 13th percentile — close to the low before the last cyclical rally.
3. Commodities: bullishness is broadening out
Commodity sentiment was bifurcated for a long time. That is starting to change. Our broad commodity SMA is now up to the 69th percentile, a 4-year high.
Sentiment Overview
- Our proprietary Buy-Side Sentiment Tracker for May showed the same lack of broad-based bullishness as many other indicators.