Sentiment Vibe Check Says More Stock Gains Will Be a Challenge

(Bloomberg) -- Twists and turns across the US stock market this year from tariff threats to DeepSeek’s AI spook have done little to shake investors’ happy-go-lucky attitude toward American equities, a potential contrarian signal for traders.

The Bloomberg Intelligence Market Pulse Index, a sentiment indicator that serves as a contrary indicator, is hovering in “manic territory,” implying muted returns for US stocks in the near term. When the gauge reached such a threshold in the past, the Russell 3000 Index proceeded to gain 1.7% on average in the next three months, a mere fraction of the roughly 9% advance posted whenever the index flashed “panic.”

The current reading around 0.7 indicates “the market remains vulnerable in the short run,” according to BI equity strategist Gillian Wolff. The BI indicator ranges from 0 to 1, with the higher end reflecting risk-on sentiment, or “mania,” while on the flipside, a level near 0 suggests an aversion to risk, or levels of “panic.”

Sentiment around US equities is elevated despite compounding risks around the economic outlook as the Federal Reserve signals plans to keep interest rates elevated for longer and President Donald Trump unleashes a salvo of tariffs on key trade partners.

Data on Friday showed US job growth moderated in January after annual revisions revealed less strength in the labor market last year than previously thought, and that consumer sentiment also declined to a seven-month low over worries about inflation. Meanwhile, earnings from the American technology behemoths carrying the US stock rally over the past two years have done little to temper concern around their growth prospects and heavy spending on artificial intelligence technology.

Still, the S&P 500 Index is hovering close to a record, and Wall Street’s appetite for US stocks remains at a three-year high, according to Bank of America Corp. An indicator from the firm that tracks sell-side strategists’ average recommended allocation to equities in a balanced fund in January stood at its highest level since 2022 and was 1 percentage point away from flashing a contrarian “sell” signal.

BofA’s gauge doesn’t catch every stock market rally or slump, but it has a strong track record of historical predictive capability for subsequent 12-month S&P 500 total returns, similar to BI’s index. Whenever the Sell-Side Indicator from BofA was at its current threshold or higher, returns for the S&P 500 over the next year have been positive just 65% of the time versus 82% overall.