U.S. Stocks Are Gaining Ground On Bearish Investors

There is a growing consensus among both amateur and professional investors that U.S. stocks have the potential to continue their ascent in the coming months. This sentiment shift has been triggered by the S&P 500's rise of over 20% from its October lows, marking the end of its longest bear-market period since 1948.

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Various sentiment surveys have been conducted recently, all pointing towards increasing optimism among individual investors, market newsletter authors, and professional money managers regarding the market's outlook. The American Association of Individual Investors Sentiment Survey revealed that 44.5% of respondents expected U.S. stocks to rise in the next six months, with 24.3% maintaining a bearish stance and the remainder adopting a neutral view. This was the first time since November 2021 that bullish sentiment surpassed bearish sentiment by more than 20% and exceeded the long-term average of 37.5%.

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Professional investment managers have also experienced a change of heart, as evidenced by the National Association of Active Investment Managers' Index, which showed a surge in average exposure to the U.S. equity market to over 90% by the week ending June 7. This marked the highest reported exposure since November 2021.

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Furthermore, the Investors Intelligence Advisors' Sentiment Report indicated that bullish sentiment among professional advisers has reached its highest level since the peak of U.S. stocks in January 2022.

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Analysts offer differing interpretations of these developments. Some view the shift in sentiment as an indication that investors will continue to pursue the stock market rally, potentially focusing on small- and medium-cap stocks that have shown signs of a turnaround after a period of lackluster performance. Others see it as a potential turning point, cautioning that bear-market rallies in the past have often given way to new lows just as sentiment started to improve.

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The Fear and Greed Index from CNN, which incorporates multiple market-based inputs, including the S&P 500 moving average, put-to-call ratio on S&P 500 options, Cboe Volatility Index (VIX), and relative demand for bonds versus stocks, has also surged into "extreme greed" territory, reaching levels not seen since early February. Similar instances in the past coincided with short-term market tops that lasted until late last month.

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The shift in sentiment represents a significant departure from earlier in 2023 when both Wall Street professionals and individual investors were skeptical about the potential for a sustained rally. However, since then, U.S. stocks have continued to rise despite challenges such as bank collapses, persistent inflation, and further interest rate hikes by the Federal Reserve.

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One crucial factor contributing to the stock market's strength, according to experts, is the absence of the recession that bond-market and consumer-sentiment data had been signaling for some time. This has led to improved expectations for corporate earnings for the remainder of 2023 and early 2024, which, in turn, has made stock valuations more attractive relative to bonds.

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As a result, analysts believe that stocks, particularly small- and mid-cap stocks represented by indices like the Russell 2000 and S&P 400 midcap index, may experience further gains. These indices have outperformed the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average in June.

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Dr. Ed Yardeni, president of Yardeni Research, suggests that the rally may broaden out to include sectors beyond mega-cap technology stocks that have driven much of the Nasdaq's performance this year. Yardeni has been bullish on the market since shortly after the S&P 500's low in October 2022.

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On Monday, U.S. stocks continued their upward trajectory, with the Nasdaq Composite posting its longest winning streak since 2019. The S&P 500 and Nasdaq Composite both recorded gains, while the Dow Jones Industrial Average trailed slightly. The Russell 2000 also advanced, adding to its strong performance in June.

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It is important to note that market conditions can change rapidly, and investors should exercise caution and conduct thorough research before making investment decisions.

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