“Gonna take a sentimental journey
Gonna set my heart at ease
Gonna make a sentimental journey
To renew old memories…”
(From “Sentimental Journey,” by Les Brown & His “Band of Renown,” sung by Doris Day, 1945)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
We are now halfway through 2026 and, just like the investment market overall, market and investor sentiment have been on somewhat of a wild ride.
We have a new Fed Chair – Kevin Warsh – who made a strong impression in his first post-FOMC press conference. To paraphrase Eddie Murphy from the movie 48 Hours: “There’s a new sheriff in town and his name…is Kevin Warsh.”
Most analysts following the Fed had already anticipated that it would hold rates steady in its June meeting and the post-meeting “narrative” would be that the Fed had moved from an easing to a tightening bias (We wrote extensively about this in our recent three-part blog series on “What Moves the Fed.”)
This is exactly the outcome that occurred, and yet the market reacted quite negatively – equities went down, Treasury yields went up, the overall yield curved flattened further, expectations for at least one Fed rate hike by year-end increased, and the dollar strengthened.
We happen to believe this was an overreaction and that markets will “re-normalize” in the coming weeks and months.
The economy seems to be in solid shape, the labor market remains resilient and, while inflation is trending in the wrong direction, it has not yet reached what we would view as an economically problematic level – though we have not yet felt the long-term effects of the war with Iran. We are hopeful the current negotiations result in a lasting peace and a return to a freer flow of good and resources through the Strait of Hormuz, but the long-term results remain very much “to be determined.”
So, as we head into Q3, it seems an appropriate time to check in on market and investor sentiment. We continue to see an interesting phenomenon – the “hard” market data (actual economic metrics) seem to be signaling a resilient economy, Q2 earnings were solid, and the stock market is performing well.
But the “soft” market data – the results of various consumer and investor surveys – seem to signal that people just don’t believe things are going very well.
This has led to a continuation of what the market is calling a “K-shaped economy” – where the normally somewhat correlated consumer sentiment and stock market trends have deviated wildly.
Source: St. Louis Fed (FRED, through May 2026. The blue line shows the performance of the S&P 500 index while the orange 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. In other words, markets can rally or fall beyond underlying fundamentals for extended periods of time before the fundamentals “catch up.”
Let’s begin our analysis by examining current economic, labor, and inflation conditions.
The current median estimate for Q2 GDP growth is 2.5% (with some outlier forecasts skewed to the upside) – which represents solid growth.
Source: The Capital Spectator, as of June 10, 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 remarkably resilient.
Source: The St. Louis Fed (FRED), through May 2026.
Inflation is trending in the wrong direction but, in our opinion, has not reached problematic economic levels yet, though it certainly has weighed on consumer sentiment, which we will discuss below.
Source: The St. Louis Fed (FRED), 5-year data through May 2026.
Although not technically within the Fed’s mandate, it does pay attention to the stock market, so let’s take a quick look at YTD performance,
It has been a “V-shaped” market so far in 2026 – a decline through the end of Q1, followed by a more-or-less continuous rally (ex-China) since mid-April.
Source: Ycharts, YTD data through June 18, 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 a to-be-expected spike in market volatility (as measured by the “VIX) when the Iran war broke out in late March, volatility has returned to its somewhat complacent level of below 20%. The markets more or less “shrugged off” the war, assuming it would end fairly quickly, and things would return to “normal.” We’re not so sure that’s how things will turn out, but that’s where the market is as we write this.
Source: Ycharts, YTD data as of June 18, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Similarly, bond market volatility, as illustrated by the Bank of America Merrill Lynch (BofAML) “MOVE” index, remains remarkably “quiescent,” especially given the geopolitical events of the past several months. As with the VIX, we do see a spike when the Iran war broke out, but it has quickly reverted back to its lower levels.
Source: TradingView, YTD data through June 18, 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 is increasingly falling behind.
Source: St. Louis Fed (FRED), 5-year data through April 2026.
Source: CCI, University of Michigan, and VettaFi Advisor Perspectives, as of May 2026.
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.
Through May, the NFIB Small Business Optimism Index fell to its lowest level since October 2024. The primary issues owners are concerned about include:
- Labor costs,
- Inflation, and
- High fuel costs, which smaller businesses have a more difficult time passing through to consumers.
[NOTE: The NFIB survey has suffered from a low response rate in recent months, so the results should be taken with a grain of salt.]
Source, NFIB and VettaFi Advisor Perspectives, as of May 2026.
What about the CEOs of larger companies? In comparison to consumers and small business owners, large company CEO optimism is relatively stable and trending slightly upward as business leaders see “stable demand, solid backlogs, and pockets of growth.”
Source: the CEO Confidence Index from the Chief Executive Group, as of June 8, 2026.
On almost every indicator, more CEOs are expecting conditions to improve versus deteriorate.
Source: the CEO Confidence Index from the Chief Executive Group, as of June 8, 2026.
Another CEO survey, this time from the Business Roundtable, shows agreement with this generally optimistic outlook, though the general outlook remains at the lower end of historical averages.
Source: Business Roundtable CEO Survey and The Daily Shot, as of Q2 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 have turned slightly more bearish versus historical averages, perhaps because of negative overall sentiment and concerns over valuations, inflation, or geopolitical events.
Source: AAII Investment Sentiment Survey, as of June 17, 2026.
A slightly bearish sentiment is not keeping investors from pouring money into the stocks market as “FOMO” (Fear of Missing Out) is alive and well (ex-China).
Source: Bloomberg Markets Daily, as of June 19, 2026.
Another variation of the AAII survey is the Investor Sentiment index. Here we can again see the slightly bearish mentality of retail investors, though it has been trending in a more bullish direction in the past few weeks (a negative percentage indicates more bears than bulls, and vice versa).
Source: Ycharts, 12-month data as of June 18, 2026. Past performance is no guarantee of future results.
We see from Deutsche Bank another indication that retail investors may be turning cautious.
Source: Deutsche Bank and The Daily Shot, as of June 15, 2026. A “Z-score” measures how many standard deviations from the historical mean a particular measurement is. In this case, the negative Z-score indicates investors are allocating less money to equities than the historical mean allocation. Past performance is no guarantee of future results.
The Goldman Sachs US Equity Sentiment Indicator, however, indicates a relatively “neutral” stance, with equity investors modestly bullish in their current positioning.
Source: Goldman Sachs and Isabelnet, as of June 12, 2026. A “Z-score” measures how many standard deviations from the historical mean a particular measurement is. In this case, a relatively 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 to slightly negative stance toward risk.
Source: State Street Global Advisors “Risk Appetite Index,” as of Q1 2026. Past performance is no guarantee of future results.
At the same time, however, while institutional investors are moving to “derisk” their portfolios, they remain overweight to equities versus historical levels.
Source: State Street Global Advisors “Risk Appetite Index,” as of Q1 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.
Interestingly enough, we see an uptick in risk-taking, though active managers seem to be positioning their portfolios more in line with historical averages.
Source: National Association of Active Investment Managers (NAAIM) and MacroMicro.com, 12-month data as of June 17, 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 the general equity market rally of the past several weeks, we see investors moving to a somewhat ”fearful” position with respect to their risk appetites.
Source: CNN Business, as of June 18, 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.
As with several other investor sentiment indicators, we see a relatively neutral mood with current investors, but seemingly with a note of caution.
Source: The CBOE and Ycharts, YTD data as June 19, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Summary and Interpretation
What these various investor and market sentiment indicators suggest is that, despite relatively positive “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 different version of a “K-shaped” market (hard data “up” but sentiment “down”).
This is interesting given the solid economy, recent market rally, and a Q2 that delivered positive earnings growth. Valuations are elevated, but these valuations are being driven more by earnings growth than by multiple expansion – which we view as a healthy condition.
We believe this uncertainty comes from two primary sources:
1. Inflation fears. Despite a growing economy, wages at the national level are falling behind the rate of inflation. Further, even if the current “Memorandum of Understanding” between the US and Iran holds and leads to peace and a complete reopening of the Strait of Hormuz, the longer-term effects on inflation from its closure have not yet been really felt by US consumers.
Yes, food and energy prices have risen and are cause for concern, but they haven’t been high enough for long enough to cause significant economic damage, even if they have caused a general souring of consumer sentiment. Also, a low level of optimism has not yet led to any corresponding decline in consumption – just higher levels of consumer unease.
Another observation: Economic analysts remove food and energy prices from the headline CPI number to arrive at a “core” inflation reading. They do this because food and energy can be volatile, so presenting a “core” inflation level gives a more stable view of underlying inflation.
The problem with this, of course, is that food and energy constitute a significant percentage of most Americans’ monthly budget, so if those prices are going up consumers don’t really care what the “core” inflation number is.
Source: Bureau of Labor Statistics, as of May 2026. “All items less food and energy” represents the “core” inflation reading.
2. Artificial Intelligence (AI):
- Despite increasing evidence to the contrary, there remains residual uncertainty about the ability of AI to drive increased productivity in the non-mega-cap tech stocks;There also remains residual uncertainty about the ability of the mega-cap tech stocks to translate massive amounts of committed debt-raising into profitability; and
- Many workers/consumers are fearful that AI or robotics will either replace their jobs or put downward pressure on wages and/or new hiring.
When you combine this residual uncertainty over inflation and AI, an impending mid-term election that promises to be highly partisan and acrimonious, 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.