US equity bull market remains intact despite fragile sentiment
CIO Daily Updates
From the studio:
From the studio:
Thought of the day
Thought of the day
Investor sentiment took another hit on Thursday amid fresh tariff headlines and concerns over NVIDIA’s near-term growth outlook, with the S&P 500 falling 1.6%, erasing all of its gains for the year. The Nasdaq was down 2.8%.
US President Donald Trump said his proposed 25% tariffs on Mexican and Canadian goods will take effect on 4 March, alongside an extra 10% duty on Chinese imports on top of the 10% tariffs that went into effect early February. He added that fentanyl was still coming into the US from these countries “at very high and unacceptable levels.”
Investors have had to contend with fast-moving headlines over the past few weeks and months—the Federal Reserve’s signal of a slower pace of monetary easing, sticky inflation readings, the emergence of low-cost AI models like DeepSeek, weaker consumer confidence, and still-elevated geopolitical uncertainty in the Middle East and over the war in Ukraine.
Indeed, data points are showing that investor sentiment is poor. Earlier this week, the American Association of Individual Investors (AAII) reported that only 19% of respondents to their weekly survey are expecting stocks to be higher over the next six months. This is lower than 98% of all observations since the survey started in 1987. More technical measures of investor sentiment, such as the put-call ratio, also suggest high levels of investor fear.
But while we have cautioned that volatility is likely to be higher this year due to policy uncertainty and trade frictions, we reiterate our view that the bull market is intact, and we expect US equities to end the year higher.
Very low sentiment readings tend to be a contrarian indicator. Perhaps somewhat counterintuitively, stocks typically perform well after poor sentiment readings. Based on historical data over the past 38 years, when less than 25% of respondents to AAII survey were bullish, the S&P 500 average return for the following 12 months stood at over 15%. This compares with an average return of around 9% in all periods. In fact, not only do returns tend to be higher, there is also a higher probability of a market gain—stocks are higher 85% of the time a year later.
While some tariffs are likely to be enacted, they remain part of Trump’s negotiation approach. We don’t think the Trump administration will take measures that have long-lasting negative impacts on economic growth or inflation, given it is not a winning political strategy. What we do expect is for bilateral negotiations between the US and its trading partners to continue in the background as tariff-related headlines persist. More countries are likely to be threatened with tariffs in the coming weeks and months, but we expect various deals to be struck to limit their overall breadth and scale. In fact, we believe that President Trump could be actively seeking deals in the first 100 days of his administration, particularly if US economic activity is potentially at risk from failure to agree.
The fundamentals remain favorable for stocks to rise further. We have highlighted that healthy economic and profit growth, supportive Fed policy, and sustained AI spending and adoption will underpin the rally in US equities this year, and we think these drivers remain intact. Inflation should moderate further, allowing the Fed to resume cutting rates later this year, and big tech’s spending commitments remain strong and growing. We continue to expect solid earnings growth of 8% for the S&P 500 this year.
So, instead of retreating from the markets in the face of uncertainty, we believe hedges are worth considering for investors to navigate volatility ahead. Capital preservation strategies can help manage downside risks in equities, while exposure to quality bonds and gold can help stabilize and diversify portfolios.
