Market Sentiment Shows Bearish Trends, Potential S&P 500 Gains Ahead

Since 1987, the American Association of Individual Investors (AAII) has tracked market sentiment via weekly surveys. Investors respond to a simple question: Do you expect the stock market to rise (bullish), stay the same (neutral), or fall (bearish) over the next six months? Conducted from Thursday to Wednesday, these results are published every Thursday morning.

As of March 20, bearish sentiment has surpassed 50% for four consecutive weeks. This level of negativity is uncommon, especially over multiple weeks. Since 2009, such sustained bearish sentiment has only occurred twice.

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The AAII investor sentiment survey is often viewed as a contrarian indicator, suggesting that the stock market frequently performs well after periods of heightened bearish sentiment. Historically, the S&P 500 (SNPINDEX: ^GSPC) has been known to rise by approximately 23% in the year following such sentiment spikes. Here are the key insights.

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Potential for S&P 500 to Rise 23% Over the Next Year

Since January 2009, the AAII has conducted 846 weekly surveys. The latest, released on March 20, 2025, indicated a bearish sentiment of 58.1%. This reflects that a majority of participants expect the stock market to decline in the next six months.

Of the 846 surveys conducted since 2009, bearish sentiment has reached over 50% on only 39 occasions, less than 5% of the time. Notable spikes occurred during the latter part of the Great Recession in 2009, early days of the Covid-19 pandemic in 2020, and during inflation peaks in 2022.

The AAII survey’s contrarian nature supports the idea that elevated bearish sentiment can lead to stock market upswings. The S&P 500, regarded as a key barometer for the general U.S. stock market, has historically returned an average of 25% over the 12 months following weeks when bearish sentiment exceeded 50%.

While past performance cannot predict future results, this data helps inform current market strategy. On March 20, 2025, the S&P 500 closed at 5,663. If it follows historical patterns and climbs 25%, it could reach 7,079 within a year. This suggests a potential upside of 23% from its current level of 5,750.

Impact of Tariffs on Recent Market Sentiment

Recent weeks have seen a surge in bearish sentiment, largely driven by tariffs imposed by the Trump administration on various imported goods. This situation could escalate as the president plans to introduce reciprocal tariffs—matching export taxes on U.S. goods—starting April 2.

David Kelly, chief global strategist at JPMorgan Chase, noted that tariffs can negatively impact the stock market by increasing prices, slowing growth, cutting profits, raising unemployment, worsening inequality, reducing productivity, and escalating global tensions. However, he also mentioned that tariffs could be harmless if used temporarily for negotiating trade terms.

Wall Street seems to lean toward this optimistic view. Analysts from 17 investment banks and research firms have an average year-end target for the S&P 500 at 6,551, which would imply a 14% increase from the current level of 5,750 by the end of 2025.

Here is the bottom line: The direction of the stock market remains uncertain for the next year. Both the S&P 500 and the technology-heavy Nasdaq Composite are currently down from their peaks—6% and 10%, respectively. Historically, both indexes have rebounded from previous declines, suggesting that the current environment may present a potential buying opportunity for investors willing to wait out short-term fluctuations.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.