“Fly me to the moon
And let me play among the stars
Let me see what spring is like
On Jupiter and Mars…”
(From “Fly Me to the Moon,” most famously covered by Frank Sinatra and Count Basie, 1964)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
The third quarter just ended, and the Fed met market expectations and cut interest rates by 25-bps at its September FOMC meeting.
This follows a summer of remarkable market complacency, despite ongoing political, geopolitical, and trade/tariff uncertainties. The economy and labor market are proving to be resilient (though showing signs of cooling) and, while inflation remains stubbornly above the Fed’s target, it does not yet appear problematic.
Q2 earnings were generally strong and Q3 is expected to continue this trend.
So, what could possibly go wrong? Based on current market and investor sentiment, apparently not much. Which makes our “Spidey sense” tingle.
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.
Let’s begin our analysis by examining current economic, labor, and inflation conditions.
One of the unknowns, of course (at least as we write this), is the current federal government shutdown. While we expect the shutdown to be relatively short-lived and have little long-term economic impact (this typically has been the case historically), it does add some uncertainty to future economic growth and corresponding Fed rate moves. Specifically, a lack of current data may affect the Fed’s decision regarding an October rate cut (or not).
Source: Bloomberg Markets Daily, October 1, 2025.
With that said, the current median estimate for Q3 GDP growth is 2.1% (with some outlier forecasts skewed to the upside) – perhaps not robust, but solid (and the Q2 GDP estimate was just “upgraded” from 3.3% to 3.8%).
Source: The Capital Spectator, as of September 25, 2025. 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 – while the labor market has proven resilient, we are seeing potential signs of cooling.
Source for both graphs: The St. Louis Fed (FRED), through August 2025.
Finally, from a macro perspective let’s look at some inflation metrics. We see that inflation remains above the Fed’s targeted 2% annualized rate. Furthermore, note that the Producer Price Index (PPI) – the cost of inputs to manufacturers and other producers of goods – is rising and has now matched the consumer inflation metrics.
So far this year, any inflationary effects from tariffs have been muted by (a) producers stockpiling inventory prior to the April “Liberation Day” announcements, and (b) producers choosing to “eat” the rising costs of inputs and not pass them through to consumers in the form of higher prices. How much longer can this last?
Source: The St. Louis Fed (FRED), through August 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 earnings and valuations in the US.
Large cap earnings and revenues (as measured by the S&P 500 index) posted a solid Q2 earnings season, and expectations are for continued growth as we move through the remainder of 2025 and into 2026.
Source: Zacks Earnings Report, as of September 26, 2025. 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, the mega-cap tech stocks remain historically expensive (and therefore so do large cap stocks more generally, since the S&P 500 index is so heavily weighted to those mega-cap stocks), but small and mid-cap stocks remain valued in line with their historical averages.
Source: Yardeni Research, as of September 30, 2025. 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,” has basically gone to sleep.
Source: Ycharts, 12-month data as of October 2, 2025. You cannot invest in an index and past performance is no guarantee of future results.
We see similar complacency in the bond market, as illustrated by the Bank of America Merrill Lynch (BofAML) “MOVE” index.
Source: Yahoo!Finance, as of October 2, 2025. 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 will 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 concern over the state of the economy because of ongoing tariff uncertainties.
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.
Unlike the two consumer surveys, the most recent NFIB Small Business Owner Optimism Index shows a two-month increase, as business owners seem more confident about both the level of sales and profitability in the coming months. Since small businesses employ more than 50% of the US workforce, this is a positive sign.
Source, NFIB and VettaFi Advisor Perspectives, as of August 2025.
What about the CEOs of larger companies? In general, CEO optimism is relatively stable but declining slightly from previous months (first chart), partly because business volatility has consistently shown to be worse than forecasted (second chart).
Source for both charts: the CEO Confidence Index from the Chief Executive Group, as of September 2025.
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 becoming increasingly bullish, although the survey is closely split between bullish and bearish investors.
Source: AAII, as of October 1, 2025. Past performance is no guarantee of future results.
Another variation of the AAII survey is the Investor Sentiment index. Here again we see a bullish move on the part of investors.
Source: AAII and Ycharts, 12-month data as of October 2, 2025. Past performance is no guarantee of future results.
We see from Deutsche Bank an uptick in consolidated equity positioning by investors.
Source: Deutsche Bank, as of September 30, 2025. 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.
Source: Goldman Sachs and Isabelnet, as of September 29, 2025. A “Z-score” measures how many standard deviations from the historical mean a particular measurement is. In this case, the negative Z-score indicates that investors are allocating less money to the equities than the historical mean allocation. 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 seem robustly bullish, as their allocations to equities are the highest since November 2007.
We hesitate to remind you, but we will, that the Great Financial Crisis began in early 2008, culminating in the crash in September-October of that year. But, as the required disclaimer goes, “Past performance is no guarantee of future results.”
Source: State Street Global Advisors “Risk Appetite Index,” as of August 2025. 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 some (but not all) of the other indicators, we see a move toward a more “risk off” positioning within actively managed accounts, although the overall exposure level remains well within the historical average (i.e., active investors may be downsizing their risk but that does not necessarily mean they have turned bearish).
Source: National Association of Active Investment Managers (NAAIM) “Exposure Index,” as of October 2, 2025. Past performance is no guarantee of future results.
Still another sentiment indicator is the CNN Business “Fear and Greed” index, which indicates investors have moved into a “neutral” position, perhaps leaning slightly toward “greed.”
This may partially be due to the “Fear of Missing Out” (FOMO) phenomenon, that is, investors are leery of market valuations and economic uncertainties but are fearful of missing out on a continuation of the recent market rally.
Source: CNN Business, as of October 3, 2025. 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 cautious but bullish mood.
Source: The CBOE and Ycharts, 12-month data as October 3, 2025. 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 we currently are in a market environment of general optimism, with perhaps some signs of caution.
We can attribute this “mood” – despite elevated valuations – to a generally benign economic environment, anticipation of reasonably solid earnings going forward, and the assumption of an accommodative Fed.
A more cynical perspective is that it may also be the result of perhaps dangerous market complacency. To some degree, many parts of the market are “priced for perfection,” and it would not take much to cause a disruption.
Unfortunately, those disruptions are rarely foreseeable or, put differently, they are “known unknowns.”
As strategic investors, we recognize it can be difficult not to react to short-term market gyrations. But we believe that is the correct approach.
Our investment philosophy is to build “all weather” portfolios that deliver consistent performance regardless of short-term “noise” and uncertainty in the marketplace. We will, of course, recommend changes if we see a longer-term market change affecting potential returns over a reasonable time horizon.
In the meantime, we will continue to recommend patience, discipline, and a focus on a longer-term time horizon.
As always, we welcome your questions and feedback.