Investor Bearishness Surges, Yet Historical Data Suggests Potential Market Gains Ahead

As financial markets cooled off in February, investor sentiment spiked downwards near a historic low. However, past bearishness has often amplified returns in the future.

What Happened: The AAII Investor Sentiment Survey found investors particularly bearish in the week ending Feb. 26.

Of the investors surveyed, 19.4% had a bullish outlook on the economy, 20% were neutral and 60.6% were bearish. This marks the highest level of bearish sentiment this year, well above the historical average of 31%, and only briefly exceeded in September 2022.

Poor sentiment is likely tied to sticky inflation, possible tariffs from the Trump Administration and a pullback in the artificial intelligence industry.

Why it Matters: According to LPL Financial, markets frequently overperform following periods of extreme bearishness.

“…historically, when the bull-bear spread has been at comparable levels of more than two standard deviations below the average (which has occurred only 4.1% of the time going back to July 1987), S&P 500 returns have been above average,” a report from LPL’s George Smith said.

Following “extremely bearish” sentiment spreads, the SPDR S&P 500 ETF Trust SPY has historically returned over 10% within a year, higher than the average return during bullish markets.

LPL Financial also noted the Bank of America Global Fund Manager Survey, which painted a rosier picture of sentiment on Wall Street. Survey respondents are cautiously optimistic, with 82% believing a global recession is unlikely in the next year.

Year-to-date, the S&P 500 is roughly even, following a strong year for the index in 2024. The tech-focused NASDAQ QQQ has fared worse, shedding 1.78% of its value in 2025.

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