Eleven Signals. One Pattern.

Editor’s Note: I originally published this analysis at the end of May, during a period when the market narrative sounded very similar to what we’re hearing today. Investors were equally pessimistic about inflation and the broader Artificial Intelligence investment cycle. My view hasn’t changed: this negativity remains a source of potential upside as AI continues to make domestic companies more efficient and productive.

There will be no commentary next week, as I will be out of the office.

Eleven Signals. One Pattern.

• Economic strength is accelerating even as sentiment collapses to record lows.

• AAII investor sentiment recently inflected after a long stretch of pessimism.

• Past cycles have led to above-average S&P 500 returns.

Bull markets don’t die in fear; they die in euphoria…

We just received an encouraging snapshot of U.S. economic momentum, but you wouldn’t know it from the mood on Wall Street. According to the latest release from the U.S. Bureau of Economic Analysis, domestic output grew at a 2% annual rate in the first quarter. That marked a sharp acceleration from the 0.5% pace at the end of last year. In other words, the economy didn’t just sidestep the slowdown many expected; it quietly strengthened.

And the momentum may be building. The Federal Reserve Bank of Atlanta’s most recent GDPNow estimate suggests second‑quarter growth could climb toward 4 percent. That’s not the profile of an economy losing altitude. It’s the profile of one that continues to expand despite higher rates, geopolitical noise, and a steady drumbeat of recession calls that never quite materialize.

Yet sentiment hasn’t caught up. As shown in the University of Michigan’s Consumer Sentiment Index, Americans are behaving as if they’re waiting for the next shoe to drop. The gauge, which stretches back to 1952, just hit its lowest level on record, even as the economic backdrop improves. It’s a familiar pattern: the data turns long before the mood does.

And that gap between reality and perception is often where long‑term investors find their edge. When fundamentals are firming but sentiment is still anchored in worry, markets tend to offer opportunities that only look obvious in hindsight. One of the indicators we follow closely just flashed that kind of shift: the spread between bullish and bearish AAII sentiment turned positive after an extended bout of pessimism. That pattern has historically preceded above‑average returns for the S&P 500.

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

Every so often, the market hands us a signal that’s easy to overlook in the week‑to‑week noise but meaningful when you zoom out. One of those signals just flashed again in late April. The AAII Bull‑Bear Spread, after spending nine consecutive weeks in negative territory, turned positive. For most investors, this might sound like a footnote. But historically, this pattern has been a reliable sentiment inflection point for forward equity returns.

To understand why, it helps to consider what the AAII survey captures. Each week, individual investors report whether they feel bullish, bearish, or neutral about the stock market over the next six months. On its own, the survey can be noisy. But when the spread stays negative for an extended period — meaning pessimists have outnumbered optimists for weeks on end — it often reflects a deeper emotional exhaustion in markets. Investors have already braced for bad news. And when that long stretch of negativity finally flips back to positive, it has historically marked the beginning of stronger equity performance.

This pattern has appeared 11 times going back to the start of 2000. That alone makes it notable: markets don’t hand out many clean, repeatable sentiment signals. Across those instances, the average negative streak lasted 17.1 weeks, or nearly one‑third of a year. The longest stretch ran 44 weeks from April 2022 through February 2023, while the shortest was the nine‑week run that ended in April 2026.

What makes these episodes compelling isn’t just the duration of the negativity, it’s what tends to happen next. Historically, when the Bull‑Bear Spread turns positive after nine or more consecutive negative weeks, the S&P 500 has delivered strong forward returns…

Twelve months after the signal, the index has averaged an increase of 21.1%, with a median return of 21.6%. Even more striking: the success rate. In the ten instances where 12‑month data is available, seven produced positive returns. And in the nine cases where 24‑month data exist, six of them were positive, with an average gain of 31.7%.

These are not small numbers. They’re not statistical quirks. They’re the kind of outcomes that speak to the power of sentiment reversals and the power of staying invested when pessimism is widespread.

We’ve already seen this dynamic play out recently. The last time this signal triggered was May 21, 2025. At the time, investors were still digesting inflation volatility, geopolitical tension, and a soft patch in earnings revisions. Sentiment was deeply negative. But once the spread turned positive, the market began to climb. Twelve months later, the S&P 500 had gained 27.2%, outperforming even the historical average.

Now, a new signal was triggered in late April. It’s too early to measure forward returns, but the setup is familiar: extended pessimism giving way to early signs of optimism, even as headlines remain mixed and investors remain cautious. Historically, that combination has been fertile ground for long‑term gains.

Bottom line: when the AAII Bull‑Bear Spread turns positive after a long negative run, it has often marked the beginning of strong equity performance over the next one to two years. No signal is perfect, and history never guarantees the future. But the pattern is clear. Pessimism eventually exhausts itself, optimism returns, and markets tend to move higher. For long‑term investors focused on compounding, these are the moments that matter.

Five Stories Moving the Market:

Cadence Design Systems raised its annual revenue and profit forecasts, due to robust demand for ​its AI-powered chip and system design software; the company said demand has surged as chipmakers and ⁠technology companies develop increasingly sophisticated systems-on-chip (SoCs) and AI accelerators – Reuters. (Why you should care – management said half of its record $8.1 billion backlog should be recognized as revenue over the next 12 months)

U.S. President Trump said he decided to pause U.S. strikes on Iran in order to give negotiations another chance, but stressed that he could order a return to expanded military operations if diplomacy fails - AXIOS. (Why you should care – the White House said it’s in “very deep” talks with Iran on re-opening the Strait of Hormuz as well re-launching nuclear talks)

The biggest U.S. power grid is warning that data centers may face involuntary outages under a plan to avert widespread blackouts and protect residential ratepayers from electricity price spikes; PJM Interconnection said digital warehouses that fail to secure enough power generation to meet their needs may be temporarily dropped from the grid during high-demand periods as soon as mid-2027 – Bloomberg. (Why you should care – such a policy change would likely boost demand for alternative energy resources like gas and steam turbines, small modular reactors, and solar panels)

A growing number of major brokerage firms believe there is a real risk of the Federal Reserve delivering a rate hike at ​its meeting this week, given this month's surge in oil ‌prices and the escalation in tensions in the Middle East – Reuters. (Why you should care – the bond market is pricing in a 32% chance of a rate hike compared to 10% a couple of weeks ago)

America’s biggest companies say they might need more people after all; companies ranging from railroad giant CSX to Google parent Alphabet have told investors in recent days that they plan to hire to meet growth goals or to seize on emerging technologies – WSJ. (Why you should care – companies are increasingly recognizing that human workers are necessary to work alongside Artificial Intelligence, point to sustained domestic economic growth)

Economic Calendar:

Earnings: AMT, BA, GLW, HLT, ITW, KLAC, KO, MDLZ, NXPI, SHW, SPGI, STX, UPS, V, WM

OPEC Meeting (6 a.m.)

U.S. – ADP Employment Change Weekly (8:15 a.m.)

U.S. – Retail, Wholesale Inventories for June (8:30 a.m.)

U.S. – FHFA House Price Index for May (9 a.m.)

U.S. – S&P Case‑Shiller Home Price Index for May (9 a.m.)

U.S. – Conference Board Consumer Confidence for July (10 a.m.)

U.S. – Richmond Manufacturing Index for July (10 a.m.)

Treasury Auctions $95 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $44 Billion in 7-Year Notes (1 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)