Investors haven’t been this pessimistic about stocks since 2023
Summary
Tumultuous policy changes, a potential trade war and sky-high stock prices have turned some investors bearish in 2025.
Bearishness among individual investors—measured by the percentage who expect stock prices to fall over the next six months—reached 47.3% for the week ended Feb. 12, according to the latest survey from the American Association of Individual Investors. That is the highest level since November 2023.
The unabashed bullishness that marked much of the past two years has been muddied by trade-war threats, regulatory upheaval, stubborn inflation and the dwindling expectations for additional interest-rate cuts.
The S&P 500 climbed 23% in 2024, led by a handful of stocks that touched sky-high valuations as the year progressed. And while investors haven’t totally soured on the market, the constant flurry of headlines has left some less confident in where stocks head from here.
Rising pessimism isn’t always a bad sign. Indeed, some investors use the survey as a contrarian indicator, selling when bullish sentiment touches highs and buying when bearishness jumps.
“The mood is confused. They don’t know which policies are going to stick and which ones aren’t," said Ed Yardeni, president of Yardeni Research. “It isn’t necessarily bearish, it is just not bullish."
Tom Yaeger, a 74-year-old retiree based outside Allentown, Pa., is among those re-evaluating their market outlook. He voted for Donald Trump in November’s election—but has still found some of the president’s initial moves befuddling.
“Some of it is good; some of it is just head scratching," he said, pointing to examples such as the president’s desire to take control of Greenland or his aggression toward longstanding trade partners like Mexico and Canada. “I’m in a bit of a holding pattern, trying to see which way things will go."
Recently, Yaeger moved about $600,000 out of growth stocks into value and dividend-focused funds, investing in what he hopes will be a less risky and more attractively priced part of the market.
Layered on top of that uncertainty is that gains for megacap tech companies, last year’s stars of the stock market, have lost some of their shine. The Roundhill Magnificent Seven ETF is up 2.08% this year to date, lagging behind all three major indexes.
Some investors are moving money out of stocks: Outflows from U.S. equity mutual and exchange-traded funds offset inflows by nearly $11 billion in January, meaning investors pulled more money from them than they added, according to Morningstar Direct data. In December, those funds had net inflows of $62.8 billion.
Tariffs have been one particular Trump policy that investors are watching, as President Trump whipsaws on when the duties will be implemented and which countries will be targeted. Economists have said that tariffs could make inflation worse, raise costs for American businesses and weigh on growth and therefore markets.
When asked how they thought tariffs would affect the economy, 57.4% of investors said they expected the trade policy to slow growth and increase prices, according to the AAII survey.
Those concerns have spread throughout the economy as well, dragging down consumer sentiment and worrying business executives.
Institutional investors, too, are re-evaluating risk in the market. Risk appetite turned sharply lower in February, according to the S&P Global Investment Manager Index, as equity investors re-evaluated the Trump administration’s potential effect on earnings growth and the economy. Investors’ expectations of U.S. equity returns over the coming month also turned negative.
Among the factors darkening the mood are the rapidly disappearing odds of rate cuts from the Federal Reserve. Most investors had expected the central bank to lower rates two or three times this year—but Wednesday’s warmer-than-expected inflation report likely derailed the prospect of a cut coming anytime soon.
To be sure, investors aren’t completely turning their backs on stocks. Major indexes climbed higher on Feb. 10 despite newly announced steel and aluminum tariffs. On Thursday, Trump delayed a plan to impose reciprocal tariffs on countries who charge duties on U.S. imports. That helped lift stocks.
And, after multiple years of blockbuster returns, it will take a lot to totally sour individual investors’ opinion of the equities market.
“These sentiment gauges are a factor of how spoiled we have been over the last two years," said Adam Turnquist, chief technical strategist at LPL Financial. “There is a lot of optimism baked into this year, and I think some of that will need to reset as we move ahead."
Write to Hannah Erin Lang at hannaherin.lang@wsj.com
