U.S. stocks near historical highs, but retail investors are increasingly pessimistic! Survey shows bearish sentiment rises to 53.3% and cash allocation increases significantly

Zhitong Finance APP reported that the latest weekly survey released on Friday by the American Association of Individual Investors (AAII) shows that, with oil prices remaining high and the Federal Reserve raising rates for the first time since 2023, bearish investor sentiment has risen to its strongest level since 2025. Notably, in stark contrast to the continued cooling of investor sentiment, the S&P 500 Index is currently only about 2% away from its all-time high.

The latest survey shows that 53.3% of respondents expect the stock market to weaken in the future, with the bearish proportion exceeding half; the proportion of bullish investors fell to 28.8%, marking a one-year low. This means the sentiment gap between bulls and bears in the AAII survey has widened further, with bearish sentiment exceeding bullish by 24.5 percentage points—the most pessimistic level since May 2025.

AAII Vice President Charles Rotblut stated that this level represents an "unusually subdued" sentiment, not only hitting the lowest since May 2025 but also staying below the historical average of 6.5% for the ninth consecutive week.

S&P 500 Only About 2% from All-Time High Yet Investor Sentiment Hits Over a One-Year Low

This significant decline in investor sentiment comes as US financial markets experience a wave of volatility since late summer. On one hand, oil prices have remained elevated, amplifying concerns about inflationary pressures; on the other, the Federal Reserve raised interest rates this week for the first time since 2023, reinforcing expectations that the high-rate environment may persist.

Amid multiple influences, American individual investors have clearly become more cautious. However, looking at the stock market itself, there is a clear divergence between market performance and investor sentiment. After a period of volatility since late summer, the S&P 500 Index remains just about 2% from its all-time high.

In other words, there has not yet been any significant pullback in US equities, yet AAII survey’s bearish sentiment has already surpassed 50%, with the bull-bear sentiment gap dropping to its lowest level since May 2025. This combination of "index near historical highs, investor sentiment highly pessimistic" has drawn market attention to the latest AAII data.

Over Half of Investors Increasing Cash Allocations, Nearly 20% Say 'Far Above Normal Levels'

In addition to sentiment indicators, investors' actual asset allocations also show a defensive tilt. The latest AAII survey revealed that more than half of respondents currently hold a higher-than-normal proportion of cash. Among them, 19.1% of investors said their cash allocations are "far above normal levels."

Rising cash positions usually mean investors are reducing exposure to risk assets or temporarily holding funds while awaiting better entry opportunities. Combined with the bearish proportion rising to 53.3%, this survey shows individual investors are not only becoming more cautious sentiment-wise but have also increased defensiveness in their asset allocations.

However, the AAII Investor Sentiment Survey is not just an indicator of market optimism or pessimism; some traders use it as a contrarian indicator as well.

Generally, excessive optimism may signal investor complacency, while extremely low sentiment readings mean fear and caution are becoming concentrated in the market. Therefore, when bearish sentiment hits unusually high levels, some investors will watch to see whether the market has already priced in a substantial portion of negative expectations.

In this survey, the bearish proportion exceeded the bullish by 24.5 percentage points, far below the historical average where bullish sentiment leads by 6.5 percentage points, while the S&P 500 is still just about 2% from its all-time high, underscoring the clear divergence between stock market performance and investor sentiment.