The recent American Association of Individual Investors (AAII) Sentiment Survey has revealed a significant surge in the bullish sentiment of the U.S. stock market. However, despite this encouraging development, a strategist at Jefferies cautions against relying solely on this survey as a “golden indicator” of stock-market upside.
According to the AAII Sentiment Survey, optimism in the stock market has risen by 10.4 percentage points, reaching 51.4% – the highest level since April 2021 – during the week ending on Wednesday. This marks the seventh consecutive week of bullish sentiment surpassing its historical average of 37.5%, establishing its longest above-average streak since May 2021.
Furthermore, the survey highlights a significant gap between stock-market bulls and bears, with a 14.7 percentage point increase to almost 30%. This divergence signifies an “unusually high level” of disparity between investors who hold optimistic views towards stocks and those who anticipate a decline.
Despite these statistics, Andrew Greenebaum, Senior Vice President of Equity Research Product Management at Jefferies, emphasizes the limitations of the bull-bear spread as a reliable indicator for future stock-market gains. Greenebaum argues that the survey has historically struggled to accurately predict market tops and bottoms.
“In either direction, what it does provide is a precise picture of what has already transpired in the stock market,” notes Greenebaum in a Saturday note.
Additionally, Greenebaum points out that the bull-bear spread’s strong correlation with stock-market performance has its limitations. Looking back at previous instances when the spread reached the 30% level, he reveals that the subsequent 12-month performance of the S&P 500 has been over 100 basis points lower compared to the index’s all-time average.
While Greenebaum advises against reacting rashly to this information, he suggests that it indicates there is likely an above-average level of optimism already reflected in current stock prices.
In conclusion, while the AAII Sentiment Survey’s findings indicate a surge in bullish sentiment within the U.S. stock market, it is crucial to exercise caution when interpreting this data as a reliable indicator. As investors navigate the market, understanding the survey’s limitations can help inform well-informed decisions and manage expectations accordingly.
The Stock Market’s 2023 Rally: Corporate Fundamentals Weakening?
The future of the U.S. economy remains uncertain, and according to a Jefferies strategist, the stock market’s 2023 rally might be primarily based on corporate fundamentals that have already started to weaken.
Revision Ratio of S&P 500 EPS
Earlier this year, there were some positive indications regarding the earnings-per-share (EPS) of the S&P 500. The “revision ratio” for the large-cap index exceeded 1 in May, which was a promising sign for the upcoming fiscal year between January and December 2024. A revision ratio above 1 suggests that upward revisions outnumber downward revisions.
However, the optimism didn’t last long. In July, the ratio dipped below 0.75 after briefly crossing the threshold of 1. This divergence is particularly noteworthy when compared to historical data, as pointed out by Jefferies (refer to the chart below).
According to Jefferies, the SPX revision ratio has not only fallen below 1, indicating more negative revisions than positive ones, but it has also dropped to the 33rd percentile as per available data. This is a significant decline from its position in May when it was in the 68th percentile.
Second-Quarter Earnings Season Update
Although it is still early in the second-quarter earnings season, the results so far have been rather unremarkable. The Jefferies strategist notes that they appear to be “fairly average,” which is worse than the previous quarter.
Data from FactSet reveals that with 18% of S&P 500 companies reporting their actual results, only 75% of them have reported a positive EPS surprise. This figure falls below the 5-year average of 77%.
Earnings Watch: Microsoft, Meta, and Alphabet earnings are heavily reliant on artificial intelligence (AI), leading to increasing investor concerns about how these companies plan to finance such endeavors.
Current Market Performance
On Monday afternoon, the S&P 500 witnessed a modest increase of 26 points or 0.6%, reaching approximately 4,562. Simultaneously, the Dow Jones Industrial Average saw a gain of nearly 228 points or 0.7%, closing at 35,457. The Nasdaq Composite also experienced an upward trend, rising by 0.4% according to FactSet data.
Stay tuned for further updates and analysis as the stock market continues to navigate through changing corporate fundamentals.