When Pessimism Peaks, Returns Accelerate

• January consumer sentiment rebounded from a near record low.

• Similar outcomes have precipitated above average stock market rallies.

• The Nasdaq Composite has averaged a 53% return over the next two years.

It’s hard to find the signal when you’re dealing with so much noise…

One of the hardest things to do as an investor is separate reality from a narrative designed to grab your attention. The current environment is no exception. Every day, headlines seem to offer a fresh reason for stocks to fall. It’s a pattern we’ve seen often: fear sells, and the loudest voices tend to be the most bearish. Yet quite often, they miss the turn— leaving the real opportunities to those who stay calm and look past the headlines.

Case in point: last week’s release of the University of Michigan’s preliminary consumer sentiment index for January. The gauge rebounded for the second consecutive month from one of the lowest levels on record. In November, the media framed it as an economic red flag. Over the last two months, barely a peep was made about the reversal. But history tells us such a shift is bullish for investors.

When the University of Michigan’s Consumer Sentiment Index hits extreme lows, it often marks a turning point for Wall Street. Deep pessimism tends to show up when fear is peaking, and expectations are washed out. That’s not the start of a collapse, it’s usually the end of one. These moments reflect emotional capitulation. And in a market driven by expectations, that shift in mood can spark the next leg of a rally.

I’ve run the numbers. Based on what I found, troughs in consumer sentiment have consistently set the stage for strong gains in the S&P 500 and Nasdaq Composite Indexes.

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

The University of Michigan’s Consumer Sentiment Index has tracked the mood of American households for nearly 75 years. Born in the aftermath of World War II, it was built to measure how people feel about their finances, the economy, and what’s ahead. Since the early 1950s, it has offered a steady read on consumer confidence through every kind of market cycle.

Each month, researchers at Michigan’s Institute for Social Research survey at least 500 adults across the U.S. They ask questions like: How’s your financial situation? Is now a good time to buy big-ticket items? What do you expect over the next year? The answers are distilled into three key measures: current conditions, future expectations, and the headline sentiment index. The data is weighted to reflect the broader population and benchmarked to a 1966 base year, making long-term comparisons easy.

Because consumer spending drives about two-thirds of the U.S. economy, the index gets a lot of attention. When sentiment rises, people tend to spend more. When it falls, they pull back. That makes it a useful gauge for policymakers, businesses, and investors alike. It doesn’t predict the future, but it does capture the public’s pulse.

When the index makes headlines, it’s usually because it’s hit an extreme. The media uses it to argue that the economy is either about to boom or bust. I see those extremes as contrarian signals. If the gauge is making a new high, how much better can things get? If it’s plumbing new lows, how much worse can it really be?

From an investing standpoint, I focus on the pessimism. When sentiment is in the gutter, the spending mood is more likely to improve than deteriorate. And that shift tends to drive demand—for goods, services, and stocks.

So, I went back and found every major trough in the Michigan sentiment index since 1952. Then I ran the total returns (with dividends reinvested) for the S&P 500 and Nasdaq Composite based on the closing price at the end of each month when a low occurred. The results were striking.

Let’s start with the S&P 500…

Following major sentiment lows, the index has averaged gains of 29% over the next 12 months and 47% over the next 24 months. That’s well above the long-term annual average of 9.5% since 1928. And in every one of those long-term cases, the market finished higher.

The Nasdaq’s record is even stronger…

While the index hasn’t been around as long, the data still packs a punch. After major sentiment troughs, the Nasdaq has averaged gains of 41% and 53% over the following one- and two-year periods, respectively. That compares to its lifetime annual average of 11%. And like the S&P 500, every one of those instances delivered a positive return.

So, like I said at the start: the headlines may be loud, but the data speaks louder. When consumer sentiment bottoms, it’s often a setup—not for more pain, but for a steady rally. The market doesn’t wait for everyone to feel good. It moves when expectations are at their worst and the noise is the loudest. And right now, that may be exactly what’s happening.

Five Stories Moving the Market:

Some Trump administration officials and allies have expressed concern that the Justice Department’s criminal investigation into Federal Reserve Chair Jerome Powell could imperil the president’s nominees in the Senate and rattle financial markets; among those alarmed about potential fallout was Treasury Secretary Scott Bessent, who called Trump Sunday night and told him that the investigation could cause several issues for the administration – WSJ. (Why you should care – the White House is likely uninterested in causing economic problems or a stock market decline, headed into mid-term elections)

U.S. Attorney for the District of Columbia Jeanine Pirro didn’t seek sign-off from her bosses at the Justice Department before subpoenaing the Federal Reserve and has no plans to back down from an investigation into Chairman Jerome Powell – Bloomberg. (Why you should care – the White House is already trying to distance itself from the matter, implying it’s going nowhere)

Apple will use Google's Gemini models for its revamped Siri coming later this year under a ‌multi-year deal that deepens the tech giants' alliance in the artificial intelligence era and bolsters Alphabet's position in the race against OpenAI – Reuters. (Why you should care – the combination is expected to boost the iPhone calendar capabilities, driving usage, and creating a tailwind for Apple’s shares)

Federal Reserve Bank of New York President John Williams said interest rates are “well positioned” to stabilize the labor market and bring inflation back to the central bank’s 2% goal; he said risks to the U.S. central bank’s dual mandate are in “better balance” after the Federal Open Market Committee lowered interest rates by 75 basis points last year – Bloomberg. (Why you should care – Williams expects above-trend economic growth during 2026)

America’s AI boom is pushing the nation’s largest power-grid operator to the brink of a supply crisis; sixty-seven million people in a 13-state region stretching from New Jersey to Kentucky, and more than 250 data centers in Northern Virginia, get their power from a market operated by nonprofit PJM Interconnection – WSJ. (Why you should care – power plants are going offline faster than new ones can be built despite the fact that PJM expects demand to grow by 4.8% per year over the next decade) 

Economic Calendar:

Earnings: BK, DAL, JPM

BOE’s Bailey (Governor) Speaks (4 a.m.)

U.S. – NFIB Small Business Optimism for December (6 a.m.)

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

U.S. – CPI for December (8:30 a.m.)

U.S. – Real Earnings for December (8:30 a.m.)

U.S. – New Home Sales for October (10 a.m.)

U.S. – IBD/TIPP Economic Optimism for January (10:10 a.m.)

Treasury Auctions $75 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $22 Billion in 30-Year Bonds (1 p.m.)

Fed’s Barkin (Richmond, Non‑voter) Speaks (4 p.m.)

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