Investor Sentiment Hits Extremely Bearish Levels

George Smith | Portfolio Strategist

Last Updated: February 27, 2025

Additional content provided by Kent Cullinane, Analyst, Research.

The latest weekly sentiment survey data from the American Association of Individual Investors (AAII) released today shows significantly bearish sentiment from investors, marking the fourth consecutive week of predominantly bearish sentiment. 

Concerns of an economic slowdown brought on by potential tariffs, stickier inflation, and the possibility of higher-for-longer interest rates, coupled with a meaningful pullback in the technology sector, namely artificial intelligence (AI) related stocks, has dented sentiment in recent weeks. 

The percentage of individual investors who are bullish about short-term market expectations is 19.6%, while the percentage of investors who are bearish is 60.6%. The 60.6% bearish reading is the highest since September 2022 and is the third-highest reading over the last 10 years. This puts the statistic that we follow most closely, the spread between the bulls and the bears, at -41.2%, meaningfully below the 10-year average of 1.4%. 

As noted in the chart below, investor sentiment, as measured by the spread between bulls and bears in the AAII survey data, appears extreme, more than two standard deviations (SD) below the mean, when compared to history. We generally examine investor sentiment survey data from a contrarian perspective, so when the indicator is near bullish extremes, it acts as a bearish signal for stock price returns, and when it's extremely bearish, the signal turns more supportive for stocks. 

Individual Investors Continue to Sour on Markets

Source: LPL Research, AAII, Bloomberg 2/27/2025
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. 

As illustrated below, historically, when the bull-bear spread has been at comparable levels of more than two standard deviations below the average (which has occurred only 4.1% of the time going back to July 1987), S&P 500 returns have been above average. The subsequent three-month, six-month, and one-year returns have been 0.3%, 0.7%, and 0.6% above the average, respectively. 

Current Bull-Bear Spread of -41 at Extreme Bearish Levels

Source: LPL Research, AAII, Bloomberg 2/27/2025
Disclosures: AAII Bull-Bear spread brackets are based on one or two standard deviations above/below 10-year rolling average. The 10-year rolling average is 1.4% with a standard deviation of 16.2%. 
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Past performance is no guarantee of future results. 

Another survey we follow, the Bank of America (BofA) Global Fund Manager Survey, a monthly survey that solicits the opinions of professional investors and their views on various aspects of the global economy and financial markets, showed a cautiously optimistic stance among fund managers. Contrary to the AAII Sentiment Indicator, which indicates most investors remain bearish on the short-term outlook for stocks, respondents of the BofA survey remain cautiously optimistic, as 82% of respondents believe a global recession is unlikely in the next 12 months. Yet, despite their optimism, fund managers are still very concerned about valuations, with 89% believing U.S. stocks are overvalued — a level reminiscent of the dot-com bubble era. Given that the AAII Sentiment Indicator’s bull-bear spread is bearish and respondents of the BofA survey have conflicting views on the likelihood of a global recession and the valuation of U.S. equities, the consensus on markets appears to be relatively neutral. 

Summary 

While both surveys convey a recently bearish investor, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its tactical neutral stance on equities, as a steadily growing economy, strong corporate profits, and likely Fed rate cuts are offset by policy and geopolitical risks, stubborn inflation, and tepid market breadth. Looking at regional exposures specifically, the STAAC’s regional preference remains U.S. over developed international and emerging markets, largely due to superior domestic earnings power and economic growth, although forecasts for economic growth have come down some in recent weeks. The STAAC will continue to monitor upcoming economic releases, investor survey data, and other developments out of the White House and from Capitol Hill to inform tactical asset allocation guidance.