The Market’s Up, But Nobody’s Happy

The Market’s Up, But Nobody’s Happy

• AAII investor pessimism is close to April highs.

• Speculator short positioning keeps rising.

• Corporate earnings growth continues to beat elevated expectations.

We’re inches from the highs, but you wouldn’t know it from the mood on Wall Street…

Last week was a revealing test for investors. Federal Reserve Bank of Boston President Susan Collins, a voting member this year, made comments that rattled Wall Street. She explained her recent support for a rate cut. But she warned that sticky inflation has raised the bar for more near-term easing.

That was all the financial media needed. CNBC and Bloomberg ran with headlines suggesting Collins was against cuts. Stocks sold off, and the CNN Fear & Greed Index plunged into “extreme fear,” a level usually reserved for real economic trouble…

But the overlooked part of her message? Collins suggested she’d support further easing if the labor market weakens. That’s not a hard no.

Now, with the S&P 500 Index just 2.3% off its recent high, you’d think investors would be more confident. They’re not. Sentiment is still in the dumps. Bearish views are back to levels we haven’t seen since late spring, when tariff fears were swirling. Meanwhile, speculators are leaning hard against the rally, with short positions back near April’s highs.

Based on the indicators I track, I think this market still has legs. Bull markets don’t die in fear; they die in euphoria. And right now, fear is still running the show. Eventually, those pessimists will get tired of missing out, causing them to throw in the towel and chase. That’s the setup for a steady long-term rally in the S&P 500.

Earnings Growth Is Outpacing Expectations

The last few weeks have seen most S&P 500 Index member companies, 322 of them, report third quarter earnings. At the end of September, heading into the releases, Wall Street anticipated corporate earnings growth of 7.9%. Yet, since then, 82% of companies have reported an earnings beat, resulting in year-over-year growth of 13.1% so far, according to financial data provider FactSet.

At the same time, 268 companies have issued guidance for their current fiscal year (either FY 2025 or FY2026). Of those, 156 have issued guidance that is better than the consensus expectation. That has led to the average expectations for future profits per share rising…

The chart above tracks Wall Street’s 2026 earnings expectations for the S&P 500. Since the end of 2Q, the consensus outlook has climbed from $300.15 to $306.56. It has been driven in large part by a 27.3% year-over-year gain in tech sector earnings.

Remember, we’re investing in what the world will look like 12 months from now. That’s how we stay ahead of the crowd. Apply today’s market multiple to 2026 earnings, and you get an S&P 500 target near 7,050 by year-end, a 5% gain from here.

Nvidia has recently said it has $500 billion worth of backlog through the end of 2026 for its high-end AI data center chips. The company reports earnings on Wednesday. If results are as strong as the recent demand guidance, it’s likely S&P 500 earnings estimates will be headed even higher.

Investor Pessimism Is Still Elevated

According to the latest AAII survey, bearish sentiment stands at 49.1%, while bullish sentiment is at 31.6%. Bullish sentiment is below average, while bearish sentiment is above…

Interestingly, in late May, bullish sentiment briefly surpassed bearish for the first time in over 15 weeks. It was a quick shift, but notable. Similar flips in sentiment over the past decade have typically led to strong forward returns. On average, the S&P 500 gained 13% six months later and 28% after a year—with a 100% success rate.

As I continue to note, bull markets don’t die of pessimism, they end when everyone's clamoring to get in. Right now, they're not. That tells me investors who are underexposed will likely end up chasing strength when the stock market is even higher.

Speculators Keep Fighting the Tape

This next chart comes from brokerage firm Goldman Sachs. It details how momentum funds are positioning themselves in the current environment. I like to keep an eye on items like this as a contrarian signal. Especially if it starts to reach extreme levels. Based on what Goldman’s seeing, short positioning is getting stretched…

The data shows positioning based on a Z-score measurement. In other words, it tells us how many standard deviations an item is away from the mean. In statistics, 68% of all outcomes occur within one standard deviation while 95% occur within two. Once you get outside of those ranges, the outcomes become increasingly rare and are unlikely to last for a long time.

Right now, short interest is more than two standard deviations above the mean. It’s one of the most extreme readings this year, second only to April’s “Liberation Day” spike. It’s also among the highest in five years. Past setups like this have sparked sharp rebounds. Don’t be shocked if this one does too.

Employment Data Could Tip the Scales

With the government shut down, the Federal Reserve and Wall Street have been starved for updated economic data. It’s important because our central bank uses those numbers to set interest rates. At the same time, investors pay close attention as lower borrowing costs mean improved corporate margins as well as more potential funds to invest.

Now that Congress has approved a deal to reopen the government, the data from departments like the U.S. Bureau of Labor Statistics (“BLS”) should start being produced once more. In fact, this Thursday will see the release of nonfarm payroll data for the first time since early September.

Based on the data we’ve received through August, this has been one of the worst years for hiring in the last decade, with an average monthly hiring rate of just 75,000…

Yet, in the absence of official statistics, we’ve received private market data. One of those is employment metrics from payroll processor ADP. According to their numbers and revisions, the economy shed jobs in both August and September. In addition, recent weekly data have indicated that its October report may need to be revised lower.

I point this out because the ADP numbers showed a monthly average hiring pace of 73,000 through August, close to the BLS metrics. Yet, since that time, the ADP figures have weakened significantly, falling to just 60,000 monthly gains on average through October. That implies we will see a similar type of outcome as the government numbers are released. That should encourage Fed policymakers to lower rates further to support hiring and economic growth.

Bringing It All Together:

So, as I said at the top, I remain highly convicted that this market has room to run. No, it won’t be in a straight line. There will be volatility, driven by policy shifts and headlines. But with sentiment still skeptical, positioning stretched, and earnings rising, I believe the path of least resistance is higher. As a result, I continue to think we’ve got the backdrop for meaningful double-digit gains over the next year.

Five Stories Moving the Market:

A rare earths deal between the U.S. and China will "hopefully" be done by Thanksgiving, according to Treasury Secretary Scott Bessent; his comments follow a framework agreement announced last month in which Washington agreed not to impose 100% tariffs on Chinese imports and China would hold off on an export licensing regime for crucial rare earths minerals and magnets – Reuters. (Why you should care – the comments could help to ease some of the bear case against investing in technology stocks)

The U.S. and Switzerland reached a preliminary trade agreement to lower tariffs on many Swiss goods from 39% to 15%; the pending deal brings respite to Switzerland, which was hit by the highest levy the Trump administration imposed on any developed country – Bloomberg. (Why you should care - Swiss companies pledged to invest $200 billion in the U.S. by the end of 2028)

The White House is looking for ways to lower prices for U.S. consumers after voters sent a warning shot to Republicans this month over the high cost of living; following the recent election, President Donald Trump’s aides have urged him to focus on affordability, and they are drawing up plans to attempt to address voters’ frustrations – WSJ. (Why you should care – getting inflation growth to slow would remove roadblocks that make some Federal Reserve policymakers hesitant to lower interest rates)

U.S. President Donald Trump moved to lower tariffs on beef, coffee and dozens of agricultural and food goods, marking a significant rollback of his so-called reciprocal levies as he looks for ways to address Americans’ concerns about the cost of living - Reuters. (Why you should care – the White House has been offering tariff carve outs to countries who strike deals with the U.S., in addition to moving away from levies on goods that aren’t produced domestically)

European Union officials may cut growth forecasts for 2026 in an assessment of damage to the region’s economy; the outlook will point to the cumulative impact of trade threats and higher tariffs imposed by the U.S., along with the challenges of persistent weakness in Germany and political turmoil in France - Bloomberg. (Why you should care – a reduced economic growth outlook could be a catalyst for additional policy support from the European Central Bank, boosting the outlook for the U.S. dollar)

Economic Calendar:

China – CPI, PPI for October

BOJ Summary of Opinions

BOJ’s Nakagawa (Board Member) Speaks

Japan – Leading Index for September

Eurozone – Sentix Investor Confidence for November (4:30 a.m.)

Fed’s Daly (San Francisco, Non-voter) Speaks (8:30 a.m.)

Treasury Auctions $86 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)