The market is throwing off wildly conflicting signals right now.
Inflation and employment data show signs of moderation… Yet, long-term interest rates have been climbing.
Investors are debating whether AI is dangerously overextended… while many AI-related companies continue producing extraordinary revenue and earnings growth.
Housing activity looks frozen… but prices remain stubbornly high.
Stocks are near record highs… Yet, plenty of investors remain worried about recession, rates, valuations, AI spending, deficits, and a correction.
Every bullish signal seems to come with a bearish counterpoint.
But strangely enough, that confusion may be one of the healthier things this market has going for it…
History suggests today’s “uncertain conditions” could actually help support stocks… Let’s look at the data.
The market hasn’t stopped asking questions
One of the easiest ways for a market to get into trouble is when “irrational exuberance” takes over.
We’ve seen this happen before.
A hot trend starts playing out. Stocks rise. More investors pile in. Valuations increase. Eventually, the assumption becomes that almost anything associated with that trend deserves to go higher.
That’s not what’s happening today.
Despite all the excitement surrounding AI, we’re still seeing plenty of evidence that investors remain skeptical.
In the latest survey from the American Association of Individual Investors (AAII), just 34.7% of individual investors said they were bullish on stocks over the next six months—below the historical average for the fourth consecutive week.
Just one week earlier, bearish sentiment had been above its historical average for 27 consecutive weeks. And when AAII asked members about other investors’ attitudes, nearly half said they thought everyone else was too bullish.
Simply put, investors haven’t collectively thrown caution out the window.
And historically, that can be a much healthier environment for stocks than it feels.
Research from AAII going back to 1987 shows that low optimism has historically been associated with better-than-average subsequent returns.
From July 1987 through December 2022, the S&P 500 gained an average 14.3% over the 12 months following unusually low bullish sentiment, compared with an average 9.6% gain across all rolling 12-month periods.
It’s important to note that extreme fear doesn’t automatically mean stocks are about to soar. In fact, AAII found that low optimism has historically been a better contrarian indicator than high pessimism.
That distinction matters for today’s market.
The bullish argument isn’t that investors are terrified; it’s that they still aren’t especially confident.
Why is that a bullish indicator?
Simple: Markets are forward-looking. By the time everyone finally feels comfortable about the market and economy, stocks have usually already priced in much of the improvement.
When investors are still arguing that others might be getting carried away, it means not everyone has bought into the rally… and potential buyers are still sitting on the sidelines.
Record highs aren’t the warning sign many investors think
One reason investors are uncomfortable today is that stocks are already near record highs.
It feels logical to assume that buying after a big rally must carry worse odds than buying after stocks have fallen.
But history doesn’t support that assumption as cleanly as you might expect.
According to data from Ned Davis Research and Hartford Funds, since 1990 the S&P 500 has returned an average of ~14% during the year following an all-time high. And stocks were higher one year later 86% of the time.
That doesn’t mean new highs guarantee more new highs. It simply means “stocks are already at records” isn’t, by itself, a bearish signal.
A more important question is whether the fundamentals underneath those highs can support them. And so far, Corporate America continues to deliver.
Through August 7, 86% of S&P 500 companies that had reported second-quarter (Q2) results beat earnings expectations, above both the five- and 10-year averages.
The headline earnings growth number was distorted upward by unusually large gains at Alphabet and Amazon. But even excluding those two companies, S&P 500 earnings were still growing an impressive 32% year over year.
Moreover, S&P 500 revenue grew about 15%, its strongest pace since late 2021, with all 11 sectors reporting year-over-year revenue growth.
That’s the fundamental tension at the heart of this market.
Investors can make legitimate arguments about excessive AI spending, higher interest rates, stretched valuations, government deficits, or economic weakness.
But those concerns keep running into something very real: Companies are still making a lot more money.
Here’s where this argument stops working
So far, strong earnings are still challenging the bearish case. But if earnings expectations begin falling significantly, today’s skepticism starts looking much more justified.
Then there’s the risk associated with rising long-term interest rates.
Higher long-term yields make mortgages more expensive… increase borrowing costs for businesses… make new factories and data centers harder to finance… and give investors a more attractive alternative to stocks.
We’ve already seen how sensitive this market has become to yield moves. And unlike short-term rates, the Fed doesn’t directly control the 10- or 30-year Treasury yield.
That’s why we’d be very careful about assuming this market moves straight higher from here. But you also need to pay attention to what’s causing any pullback.
If stocks pull back while earnings remain strong and the broader economy continues holding up, that could create attractive opportunities in high-quality companies that have simply become cheaper.
If stocks fall because profits are deteriorating and credit stress is spreading, we’d need to reassess.
The bottom line
Investors naturally want clarity.
Is the economy weak or strong? Is AI a revolution or a bubble? Will rates go higher or lower? Are stocks expensive or bargains at current levels?
But markets rarely give investors that kind of certainty in real time.
Today’s market feels uncomfortable precisely because legitimate arguments exist on both sides.
But historical evidence shows stocks don’t need investors to feel confident to perform well.
Real risks remain, and volatility could easily increase from here. But as long as the fundamentals keep holding up, investor skepticism about the bull market may be healthier than everyone simply assuming it will continue.
Frank and Daniel just expanded on this topic on Wall Street Unplugged. You can check out the full discussion here.
