For many, the past few weeks will have felt like a painful sell-off. But take a step back, and the story is one of rotation rather than broad selling of risky assets.
The S&P 500 is only 3.3% off its all-time high. The low-beta FTSE 100 is 1.4% off its August high. But the Nasdaq 100 is down 9%, and the Robo Global AI Index is down 15%, far more than their beta would suggest. Rotation!
From a sentiment perspective, this has hit where vulnerability was greatest: the part of the market where investors were most bullish.
The core premise of sentiment analysis is that market reactions to news depend on what investors already believe and how they are positioned. When sentiment becomes extremely bullish or bearish, expectations become harder to beat in the direction everyone agrees on—and easier to upset in the other direction. A small disappointment can trigger a big market reaction.
That’s why we analyse sentiment: to understand when markets are becoming more vulnerable to a surprise, and how little it might take to change the prevailing view.
But enough of the sales pitch. Where does all this leave sentiment towards risky assets?
- Our Risk-on Risk-off sentiment indicators have not moved much this week. They have followed the S&P rather than the Nasdaq.
- The high-frequency indicators remain around the mid-50s, roughly where they have been for the past couple of weeks. More precisely, the average reading is at the 55th percentile.
- I would still characterise sentiment as neutral.
- Outright bearishness—and something akin to a historical buy signal based on sentiment alone—would require a significantly greater sell-off.
- But if your macro outlook remains broadly in line with the consensus of at least decent global growth ahead, this is becoming a sentiment setup that supports a risk-on stance.
Top 3 This Week
1. Sentiment: Neutral despite the Tech sell-off
The bigger sell-off in Tech has not translated into broad investor bearishness. Overall sentiment remains neutral.
2. Tech: Prices have fallen. Sentiment has barely budged.
Our Technology SMA remains at the 99th percentile. Past periods of Tech underperformance have typically not reversed without a more meaningful hit to sentiment.
3. Brazil: Back below the historical buy threshold
Our Brazil SMA has fallen to the 10th percentile. Sentiment is approaching levels historically followed by strong outperformance versus emerging markets.
Sentiment Overview
AAII cash allocations remain below the historical sell threshold. Cash allocations fell to 13.3% last month, their lowest level since 2018, and held there in the latest survey.
Some of that decline will reflect rising equity markets, but that would also have been true historically. When cash allocations have fallen below 14%, the S&P 500 has, on average, delivered roughly flat returns over the following year, with below-average returns 73% of the time.
For now, this remains an outlier among sentiment and retail indicators. But its historical track record makes it worth watching for confirmation from other sources.
Equity allocations also dipped, but remain far from historical extremes or buy and sell thresholds, whether measured in isolation or relative to bond allocations.
US consumers remain bullish on stocks, though off the peaks. The Conference Board survey has shown extreme bullishness for some time. It declined last month and held at that lower level in the latest reading.
There is still a sizeable gap to the New York Fed’s consumer survey, which shows less bullishness. Bigger picture, the extreme gap between how US consumers feel about the stock market and their own prospects remains as large as ever.
Economic Policy Uncertainty has risen. Our preferred indicator in the group—see our two-part EPU series for more detail—has increased for the second consecutive month.
It remains far below the extreme peaks around Liberation Day. But this will naturally become an area of focus after the midterms, when Donald Trump may be curtailed in some policy areas and turn towards the levers still available to him. Those could include trade policy.
The latest CFA/UBS survey of analyst expectations offers a few messages:
- Equities: Broad equity sentiment increased marginally and remains slightly bullish.
- US versus Europe: Unlike the analysts surveyed by ZEW, respondents favour US over European equities. This fits better with the US outperformance we have seen and growing investor concerns around European politics and debt.
- Currencies: Swiss analysts are unusually bullish on the Swiss franc. CFTC positioning data suggests growing CHF bearishness, making this an interesting counterpoint. Home bias might seem an obvious explanation, but the historical data does not support it: these analysts have more often than not preferred the US dollar to the franc, and often the euro too.
- Bonds: Bund and Treasury sentiment barely moved over the month and remains in the middle of its historical range. A modest majority expects yields to rise rather than fall. Certainly no sign of extreme bond bearishness.
- Oil: Swiss analysts take a contrarian view on oil, with far more expecting prices to decline than rise. The net bearish reading of -31% is one of the most bearish on record.
Asset Class Highlights
Technology
Technology in general, and the AI ecosystem in particular, have been on the selling end of the rotation. So far, though, our broad set of indicators has yet to register a significant decline in investor sentiment.