Wall Street thinks you don’t own enough stocks. Not specifically “you,” but given that the S&P 500 index has been in a bull market for three years and is back within 1% of its all-time high from a month ago, a group of investors is considered too lightly exposed to stocks. Deutsche Bank’s overall Investor Positioning Indicator remains near neutral. “Our sentiment indicators have spent most of this year in negative territory, reflecting the relatively conservative attitude of institutional investors,” said John Flood, head of Americas equity sales and trading at Goldman Sachs. “The wall of fear has been very high this year and remains ubiquitous (which is a bullish signal).” The reason for the focus on such valuations is that we are entering a season where “money flow” trends and investors’ mechanical maneuvering towards this year’s final scorecard tend to form the center of the bulls’ discussion. Basically, all revenue for 2025 is recorded on the books. Recent messages from the Federal Reserve have revived expectations for a rate cut on December 10th. The flow of business news will slow down as the holidays approach. As a result, market handicappers are trying to determine how much potential buying power remains among investors. Viewed through this lens, the S&P 500’s first 5% decline in seven months, which peaked a week ago Friday, went a long way toward shaking off investor jitters, resetting investor sentiment, and testing the key fundamental assumptions that fueled the bull market. Was that all it took to reverse the uptrend in a market that had been heavily overheated by speculative momentum, complacency with macroeconomic conditions, and leadership by low-quality stocks through late October? Warren Paiz, founder of ThreeFourteen Research, upgraded the stock to overweight last week in part because he believes the answer to that question is “yes.” He noted that through the third week of November, volume in “inverse” ETFs, which profit from falling stock prices, surged to more than 40% of total volume for both inverse and leveraged long ETFs. This has only happened four times in the past few years, and each time coincided with a strong rally near the index’s tactical bottom. Among other things, this suggests that a group of individual traders did not lead November’s bull-buying drive that pushed the S&P 500 index up nearly 5% in the five days through Friday, turning a 4.5% loss for the month into a modest November gain. .SPX 1M Mountain SPX 1 month chart (probably from Bitcoin’s recent lows of $124,000 to around $80,000) (Bitcoin is more closely correlated to stocks of unprofitable tech companies than any macro index or other asset market.) With interest in inverse ETFs peaking, Pais called for further upside from here. “The three big investors – retail investors, volume-targeted funds and CTAs – hedged their risk during the selloff. Meanwhile, companies are preparing to buy into the market towards the end of the year by flexing their buyback budgets.” If prices are purely a function of the relative urgency of buyers and sellers, then this kind of seasonal reasoning and demand-versus-supply case for expecting further upside makes sense on an essential level. Still, on a more structural level, retail investors’ allocations to U.S. stocks are rarely higher, based on data from Bank of America’s private client group, the Federal Reserve, and other sources. And remember, a year ago, when the S&P 500 emerged from a similar decline in late November, we heard similar talk about a “year-end catch-up.” However, the rebound increase in the second half of 2024 peaked in the first week of December, and then receded for about three weeks toward the end of the year. Those disclaimers aside, the tape action itself is encouraging, roughly in line with how stocks have behaved in recent months following corrections of more than 15%, such as the S&P 500’s decline from February to April. Strategas Research plotted the current recovery path against the average and median recovery trajectory from all previous setbacks. Note that performance in 2025 is better than the norm, but progress typically begins to at least level off at this point. Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, said after three weeks of gut-checking, looking back at the strong finish to November, “Given that October started some wild bull markets, and as fast as November was, the fact that the S&P ended the month in the green is remarkable.” More specifically, the S&P 500’s resilience in a month when Nvidia fell 12.5% was something that probably many did not expect four weeks ago. The market seemed to hear the constant complaints that the path to all-time highs was “too narrow” and too focused on the same AI winners, and responded by returning from a three-week stress test with a very broad day of gains not led by the usual “Magnificent Seven” favorites. That said, the amount of market capitalization being amassed and removed daily by large technology platform companies is not entirely reassuring. The market’s attempt to identify relative winners and losers, rather than indiscriminately rewarding all companies involved, is a laudable and necessary effort. But Alphabet’s rise from “AI victim” to “presumptive winner” while increasing its market capitalization by nearly $2 trillion in seven months may also reflect a volatile mix of fickleness, desperation, and herding among investors. The Street’s official play-callers don’t seem to care about such extreme mood swings or anything else as they look ahead to next year. About a dozen Wall Street strategists have set targets for the S&P 500 index by the end of 2026. All are expected to see at least further upside, with a median target of 7,500 and an average of around 7,580, up 10% from Friday’s closing levels. That’s not very optimistic, especially considering the consensus forecast for S&P 500 earnings growth of about 13% next year. But as things progress, the overall forecast of 10% is considered quite optimistic. The average strategist’s targets have been at or below index levels for most of this year. And as the past few weeks have shown, even in a generally robust bull market, attitudes can go too far and ultimately throw investors off balance.
