“You know I’ve been to the edge
And there I stood and looked down
You know I lost a lot of friends there, baby
I got no time to mess around…”
(From “Ain’t Talking ‘Bout Love, by Van Halen, 1978)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
We are now solidly into 2026, and it appears we may be entering a new market regime.
After 2-3 years of an equity market dominated by mega-cap tech stocks, we may be at the beginning of a significant market rotation as Artificial Intelligence (AI) works its way into the broader economy and investors seem to be broadening out their allocations to include value, small cap, dividend paying, and non-US stocks.
At the same time, investors await a new Fed Chair – Kevin Warsh – who will replace current Chair Jerome Powell in May. As we write this, the market does not anticipate additional rate cuts until at least the June FOMC meeting, though that may change as additional economic data come in.
The economy seems to be in solid shape, though we once again had to endure a temporary delay in official economic data due to yet another (thankfully short) government shutdown.
Questions remain about the future direction of inflation, the labor markets, and earnings, and investors enjoyed remarkable equity market performance in 2025. But what will 2026 hold?
As we head through Q1, it seems an appropriate time to check in on market and investor sentiment. We see an interesting phenomenon – the “hard” market data (actual economic metrics) seem to be signaling a resilient, perhaps even robust, economy, and Q4 earnings are solid.
But the “soft” market data – the results of various consumer and investor surveys – seems to signal that people just don’t believe things are going very well.
This has led to what the market is calling a “K-shaped economy” – where the normally tightly correlated consumer sentiment and stock market trends have deviated wildly.
Source: TradingView and Investing,com, as of November 11, 2025. The red line shows the performance of the S&P 500 index while the blue line shows the University of Michigan Consumer Sentiment. You cannot invest in an index and past performance is no guarantee of future results.
How do we square this circle? Let’s take a look and see if we can make sense of this apparent dichotomy.
A Quick Review of Market Fundamentals
As a quick reminder, while market fundamentals (valuations, earnings, quality,
dividends, etc.) are supposed to drive longer-term performance, in the short-medium term, equity prices can be heavily influenced by momentum and investor sentiment. Remember also that we view momentum as a “second order” risk factor – if any of the primary risk factors are rallying, momentum is likely to be rallying as well.
Let’s begin our analysis by examining current economic, labor, and inflation conditions.
The current median estimate for Q4 GDP growth is 2.7% (with some outlier forecasts skewed to the upside) – which is very solid growth.
Source: The Capital Spectator, as of February 5, 2026. This is a forecast and will change as additional data come in.
A quick look at the labor markets shows a similar state of affairs – the labor market has proven resilient, though we may be seeing signs of cooling (first chart). We have delayed hard metrics because of the temporary government shutdown from late January – early February, but this chart is through December 2025.
The jobless claims numbers (second chart), which come out weekly and are the most contemporaneous of the employment metrics, are through February 7, 2026.
What we see is a continuation of a “no fire, no hire” jobs market. People who have jobs are not losing them, but people seeking new jobs are having difficulty finding new ones.
Source for both graphs: The St. Louis Fed (FRED).
We note that January jobs came in at an estimated 130,000 – far above the consensus estimate of 75,000. At the same time, revisions to last year’s job growth fell to 181,000, down from the previously reported 584,000 – a massive downward revision. Unemployment fell from 4.4% to 4.3%.
Source: Bloomberg “Points of Return”, February 12, 2026.
Taken together, we see a weakening but still resilient job market – and the January jobs number does not send any particular signal that the Fed needs to cut rates sooner than expected. While the Fed Funds futures market is still pricing in a 25-bps cut in June and two rate cuts overall in 2026, it is also pricing in an increased probability of no rate cut until July.
On a different note, we see that the Producer Price Index (PPI) – the cost of inputs to manufacturers and other producers of goods – has now matched consumer inflation metrics.
Since producers’ operating margins and earnings remain solid, the implication is that producers have (finally) begun to pass higher input costs onto consumers, which may result in inflationary pressure as we move through the year.
Source: The St. Louis Fed (FRED), through December 2025.
Although not technically within the Fed’s mandate, it does pay attention to the stock market, so let’s take a quick look at performance, earnings, and valuations in the US.
We seem to be in the midst of a rotation away from the mega-cap tech stocks that dominated US performance over the past 2-3 years. We notice (a) a “broadening” of performance away from US large cap growth stocks and into what we consider “fundamental” factors – value, quality, size, and dividend-paying stocks, and (b) a continuation of the outperformance of non-US stocks.
Source for previous two charts: Ycharts, YTD through February 10, 2026. You cannot invest in an index and past performance is no guarantee of future results.
We are almost through the Q4 earnings season, and large cap earnings and revenues (as measured by the S&P 500 index) posted solid growth, and higher than average “beat rates.”
Furthermore, earnings are expected to continue to grow nicely through 2026, despite relatively flat revenues – perhaps an indication that the long-promised AI-driven productivity gains are taking hold in non-mega-cap tech stocks.
Source: Zacks Earnings Report, as February 4, 2026. Solid bars are actual results, while hashed bars represent estimates and will change as more data come in. You cannot invest in an index and past performance is no guarantee of future results.
From a valuation perspective, note that mega-cap tech stock valuations have fallen this year but remain elevated, and small and mid-cap stocks – despite their rally this year – remain valued in line with their historical averages.
Source: Yardeni Research, as of February 6-10, 2026. You cannot invest in an index and past performance is no guarantee of future results.
With these metrics as a backdrop, let’s now examine how the market and investors “feel” about the current state of affairs.
Sentiment Indicators
1. Market Volatility
After spiking in early April following the “Liberation Day” tariff announcements, equity market volatility, as measured by the “VIX,” was “complacent” for most of the remainder of 2025, but has picked up again in 2026.
Source: Ycharts, 12-month data as of February 10, 2026. You cannot invest in an index and past performance is no guarantee of future results.
On the other hand, bond market volatility, as illustrated by the Bank of America Merrill Lynch (BofAML) “MOVE” index, remains remarkably “quiescent,” especially given the economic and geopolitical events of the past several months.
Bond investors, at least for now, seem unphased by concerns over the federal debt and deficit, ongoing geopolitical tensions, or government shutdowns.
Source: Yahoo!Finance, 12-month data as of February 10, 2026. The MOVE index is a measure of short-term volatility in the US Treasury bond market as implied by the current prices of 1-month Over the Counter (OTC) options. You cannot invest in an index and past performance is no guarantee of future results.
2. Consumer Sentiment
It is important to remember that personal consumption represents the majority of economic activity in the US. So, if the US consumer is feeling nervous or anxious and begins to pull back on consumption, it may have a negative effect on GDP growth.
Likewise, if business owners or CEOs lose confidence, they are likely to pull back on hiring and capital expenditure programs, potentially curtailing future economic growth.
We see this trend in a variety of industry surveys.
The Conference Board Consumer Confidence Index (CCI) is a monthly survey of roughly 300 households, questioning them on their “confidence” in a variety of future market conditions. The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of roughly 600 households, questioning them about personal finances, business conditions, and buying conditions.
Interestingly, despite a relatively benign economic environment and a strong stock market, consumers seem to be growing increasingly anxious – perhaps because of continuing high prices for many staple goods and wage growth that has not caught up to the peak inflation levels of 2022.
Source: St. Louis Fed (FRED), 5-year data through November 2025.
Source: CCI, MCSI, and VettaFi Advisor Perspectives, as of September 2025.
The National Federation of Independent Business Owners (NFIB) is an advocacy group supporting small business owners in the US – which make up the majority of both economic activity and employment in the US. Their opinion of general economic conditions is therefore worth paying attention to.
While small business owners seem slightly more optimistic than consumers, we still see a slight decline over the past several months.
[NOTE: The January NFIB survey had the fewest respondents of any survey since 2006, so the results should be taken with a grain of salt.]
Source: NFIB and VettaFi Advisor Perspectives, as of January 2026.
What about the CEOs of larger companies? In general, CEO optimism is relatively stable but trending upward as business leaders believe we will see greater tax and policy clarity out of Washington as we move through the year.
Source: the CEO Confidence Index from the Chief Executive Group, as of February 9, 2026.
3. Investor Sentiment
Let’s begin by looking at the American Association of Individual Investors (AAII), which publishes the “AAII Bull-Bear Spread,” the results of a weekly survey of the optimism or pessimism of individual investors regarding the direction of the stock market.
We see investors seemingly have turned increasingly bearish, perhaps because of negative overall sentiment and concerns over future Fed policy.
Source: AAII and The Daily Shot, as of February 12, 2026. Past performance is no guarantee of future results.
Another variation of the AAII survey is the Investor Sentiment index. Here we see generally bullish (but declining) sentiment on the part of investors.
Source: AAII and Ycharts, 12-month data as of February 10, 2026. Past performance is no guarantee of future results.
We see from Deutsche Bank that, although still bullish, investors may be “pulling back” slightly in their overall equity positioning.
Source: Deutsche Bank and ISABELNET.com, as of February 9, 2026. A “Z-score” measures how many standard deviations from the historical mean a particular measurement is. In this case, the positive Z-score indicates that investors are allocating more money to the equities than the historical mean allocation. Past performance is no guarantee of future results.
Interestingly, however, we see a downtick in equity positioning in a survey by Goldman Sachs, with equity investors neither bullish nor bearish in their current positioning.
Source: Goldman Sachs and Isabelnet, as of February 6, 2026. A “Z-score” measures how many standard deviations from the historical mean a particular measurement is. In this case, a neutral Z-score indicates that investors are neither bullish nor bearish with respect to their equity allocations relative to their historical mean allocations. Past performance is no guarantee of future results.
4. Institutional Investor Sentiment
Theoretically, institutional investors are more “savvy” than retail investors, so what they think is relevant.
State Street Global Markets publishes a monthly “Risk Appetite Indicator” which tracks institutional investor fund flows — that is, not how they “feel” about the market but how they are actually positioning their portfolios.
We see a similar perspective here as we do with retail investors – institutional investors currently show a “neutral” stance toward risk.
Source: State Street Global Advisors “Risk Appetite Index,” as of February 2026. Past performance is no guarantee of future results.
At the same time, however, these investors have increased their allocations to equities so far in 2026, with corresponding declines in allocations to bonds and cash.
Source: State Street Global Advisors “Risk Appetite Index,” as of February 2026. Past performance is no guarantee of future results.
Another sentiment indicator is the National Association of Active Investment Managers (NAAIM) “Exposure Index,” which is a measure of risk adjustments active managers have made to their client accounts over the previous two weeks.
As with many of the other indicators, we see a move toward a more “risk off” positioning within actively managed accounts, and active investors seem to be positioning their portfolios more in line with their historical averages.
Source: National Association of Active Investment Managers (NAAIM) and The Daily Shot, as of February 12, 2026. Past performance is no guarantee of future results.
Still another sentiment indicator is the CNN Business “Fear and Greed” Index. Once again, and despite a general equity market rally so far in 2026, we see investors taking a “neutral” position with respect to their risk appetites.
Source: CNN Business, as of February 11, 2026. The Fear & Greed Index is a compilation of seven different indicators that measure some aspects of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. The index tracks how much these individual indicators deviate from their averages compared to how much they normally diverge. The index gives each indicator equal weight in calculating a score from 0 to 100, with 100 representing maximum greediness and 0 signaling maximum fear.
5. Put/ Call Ratio
As a final measure of market sentiment, we look at the Chicago Board of Exchange
(CBOE) “Put / Call Ratio,” which measures how options investors are behaving and
trading.
A high ratio (>1) means more put options (the right to sell stocks) are being purchased than call options (the right to buy stocks), suggesting a bearish investor outlook.
Conversely, a low ratio (<1) implies more call options are being purchased than put options — suggesting a bullish outlook.
The current indication is that investors are in a generally bullish mood but, as indicated by other sentiment indicators, they seem to be increasingly cautious.
Source: The CBOE and Ycharts, 12-month data as February 10, 2026. You cannot invest in an index and past performance is no guarantee of future results.
Summary and Interpretation
What these various market sentiment indicators suggest is that, despite relatively solid “hard” economic data – economic growth, the labor market, inflation, and so forth – we see slightly pessimistic consumers and investors. Perhaps “increasingly cautious” is a more accurate term. In other words, we see a so-called “K-shaped” market.
Certainly, we have a level of investor uncertainty as we witness a general market rotation away from the mega-cap tech stocks that have dominated performance for the past several years.
We believe this comes from two sources of uncertainty:
- Whether or not the massive amounts of debt the mega-cap tech stocks have committed to raising as they build out data centers and other computing power capabilities will actually translate into increased earnings going forward; and
- Remaining uncertainties about the ability of AI to drive increased productivity in the non-mega-cap tech stocks.
We believe we are seeing this increased productivity, but it remains early in this evolution.
When you combine this with residual uncertainty over trade and tariff policies, a mid-term election that promises to be highly partisan and acrimonious, ongoing social unrest from immigration and other Administration policies, and continuing geopolitical tensions, it is understandable that consumers and investors may be “hunkering down” a bit as they wait for better market and economic clarity.
As strategic investors, we recognize it can be difficult to not react to short-term market gyrations, but we continue to believe that is the correct approach.
Our investment philosophy remains to try and build “all-weather” portfolios that can deliver consistent performance regardless of short-term “noise” and uncertainty in the marketplace. We will, of course, recommend changes if we see longer-term market changes affecting potential risks and returns over a reasonable time horizon.
In the meantime, we continue to recommend patience, discipline, and a focus on a longer-term time horizon.
As always, we welcome your questions and feedback.