A Market Bracing for the Worst Meets a Different Signal

• Active money managers pessimism is approaching Liberation Day levels.

• The NAAIM Exposure Index recently dropped from above 100 to 60.

• Data indicate similar moves produced above average S&P 500 returns.

When everyone else is bracing for impact, that’s usually when the real opportunity slips in unnoticed…

Contrarian investing has always required a certain temperament. It demands the ability to stay steady precisely when everyone else is losing their footing. The moments that feel most uncomfortable are often the ones that matter most, because that’s where the biggest long‑term gains tend to hide.

You saw it during the COVID shock in 2020: economists warned of a downturn rivaling the Great Depression. They were unable to imagine a rapid medical response or the productivity boost technology would deliver. They missed the rebound entirely, both in the economy and in the market.…

Today’s backdrop carries a similar emotional weight. The latest developments in the Middle East have stirred up a fresh round of worst‑case narratives. Rising gas prices have sparked fears of renewed inflation and a potential return to rate hikes. Risk assets have felt that pressure, and the tone around markets has grown noticeably darker.

But lately, the narrative has begun to shift. There’s more discussion around potential negotiations and the possibility of de‑escalation. That made it a good moment to check in on investment‑manager pessimism. And what I found was telling: institutional investors are not positioned for a constructive outcome. Exposure levels have pulled back sharply, leaving managers under‑allocated if tensions ease. That means the S&P 500 Index could be poised for a sharp rally if pending talks are successful.

But don’t take my word for it, let’s look at what the data’s telling us…

One of the easiest ways to see how professional investors are positioned is through the National Association of Active Investment Managers (“NAAIM”) Exposure Index. It captures where money managers are sitting in U.S. equities, anywhere from fully short (-200%) to fully leveraged long (+200%), and distills it into a single number.

Because it reflects real allocations rather than opinions, it gives a direct read on how much risk managers are willing to carry at any moment. Rising exposure means they’re leaning in. Falling exposure means they’re stepping back, hedging, or simply waiting for the dust to settle.

The index becomes especially revealing at the extremes. When exposure surges, managers are already fully committed to the trend, leaving little dry powder if conditions wobble. When exposure collapses, fear is usually well‑priced and sellers are largely spent. It’s not a timing tool, but it reliably shows when positioning has swung too far and the rubber band is stretched.

Late last year, that rubber band was stretched tight. The NAAIM Index logged multiple readings north of 100 in November and December. That was a sign that active managers had pushed into leveraged‑long territory. But that posture hasn’t held…

Last week’s reading slipped to 60 for the first time since April 2025. That was a meaningful shift from “all‑in” to “dial it back.” It also meant the index has now fallen below the long‑term average of 67…

So, I wanted to go back and look at prior episodes where we’ve seen a similar drop. Historically, the gauge has dipped below its long‑term average roughly a quarter of the time. As the chart above shows, those moments tend to cluster around stress points: the COVID shock in 2020, the Fed’s tightening cycle in 2022, and Liberation Day in 2025.

From there, I pulled the S&P 500’s forward returns following those dips, looking at both price returns and total returns (dividends reinvested). Across the board, the index has tended to deliver above‑average gains.

Here are the price basis numbers…

One year out, the S&P 500 has averaged a 10.3% gain versus its long‑term annualized 6.2% since 1928 — with a 76% success rate.

But the total return numbers are even better…

The 12‑month total‑return numbers stand out: a 12.3% average gain with a 77% success rate, well ahead of the S&P 500’s long‑term 9.7% annualized total return.

The toughest stretches for investors tend to be when the narrative turns dark, and the loudest voices insist the sky is falling. That’s also when the NAAIM Exposure Index shows active managers at their most defensive. They pull back just as fear peaks. Yet historically, those resets have marked the moments when future returns quietly improve. These are the environments where easing back into the market has paid off. There’s no reason to assume this setup will behave any differently.

Five Stories Moving the Market:

Pakistani Prime Minister Shehbaz Sharif said the country is willing to host talks between the United States and Iran, as Pakistan’s government tries to capitalize on its standing with the leadership of both countries – NY Times. (Why you should care – a U.S. delegation is said to be preparing for a meeting with Iranian Parliament Speaker Mohammad Bagher Qalibaf in Islamabad later this week)

Iran said foreign ships are allowed to cross the Strait of Hormuz, as long as they aren’t supporting acts of aggression against the country and follow regulations put in place by Tehran – Bloomberg. (Why you should care – the bulk of the oil and gas flow that goes through Hormuz is intended for Asia, increasing the potential for cargo transit)

U.S. President Donald Trump said the U.S. was making progress ​in its efforts to negotiate an end to war with Iran, including winning an important concession from Tehran, while a source confirmed that ‌Washington had sent Iran a 15-point settlement proposal – Reuters. (Why you should care – Pakistan is said to have delivered the 15-point proposal to Iran)

Federal Reserve Governor Michael Barr said policymakers may need to keep interest rates steady for “some time” to address inflation that’s notably above the central bank’s 2% goal – Bloomberg. (Why you should care – Barr remains hopeful that inflation growth will retreat later this year, depending on the outcome in the Middle East)

Chinese Foreign ‌Minister Wang Yi called on called for all parties to seize opportunities to ​start Middle East peace talks as soon ​as possible in a phone call ⁠with his Iranian counterpart Abbas ​Araqchi, according to a statement from the government in Beijing – Reuters. (Why you should care – leaders from Asia and Europe are increasingly seeking ways to end the Persian Gulf conflict and restore oil flows)

Economic Calendar:

Earnings: CHWY, CTAS, JEF, PAYX, WGO

Australia – CPI for February

Japan – Monetary Policy Meeting Minutes

U.K. – CPI for February (3 a.m.)

ECB’s Lagarde (President) Speaks (4:45 a.m.)

Germany - Ifo Business Climate Index for March (5 a.m.)

ECB’s Lane (Chief Economist) Speaks (5:15 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. – Export, Import Price Index for February (8:30 a.m.)

Switzerland – SNB Quarterly Bulletin (10 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Treasury Auctions $28 Billion in 2-Year Floating Rate Notes (11:30 a.m.)

Treasury Auctions $70 Billion in 5-Year Notes (1 p.m.)