The sentiment indicator sounds the alarm! Under the wave of investor optimism, U.S. stocks may face a correction

The Zhitong Finance APP noted that this year, the U.S. stock market has experienced tariff threats and the DeepSeek impact crisis, but this has not shaken investors' optimism towards the U.S. stock market, which is a potential contrarian signal for traders.

The Bloomberg Intelligence Market Pulse Index is a sentiment indicator that can serve as a contrarian indicator. Currently, the index hovers in the "euphoria zone," suggesting that short-term returns for the U.S. stock market may be lackluster. In the past, when the index reached this threshold, the Russell 3000 Index averaged a 1.7% increase over the next three months, while whenever the index showed "panic," the increase was about 9%, which is only a small fraction of the index's rise.

BI stock strategist Gillian Wolff stated that the current reading is about 0.7, indicating that "the market remains fragile in the short term." The BI index ranges from 0 to 1, with the higher end reflecting risk appetite sentiment or "euphoria," while levels close to 0 indicate risk aversion or "panic" levels.

Despite the heightened risks to the economic outlook, the Federal Reserve has hinted at plans to maintain high interest rates for the long term, and President Trump has imposed a series of tariffs on major trading partners, keeping the sentiment in the U.S. stock market high.

Data released last Friday showed that U.S. job growth slowed in January, following annual revisions that indicated last year's labor market strength was below previous expectations, and consumer confidence has dropped to a seven-month low due to inflation concerns. Meanwhile, the earnings of U.S. tech giants that have driven the U.S. stock market up over the past two years have not alleviated concerns about their growth prospects and massive spending on artificial intelligence technology.

However, data from Bank of America shows that the S&P 500 Index still hovers near historical highs, and Wall Street's interest in U.S. stocks remains at its highest level in three years. The company's tracking of sell-side strategists' average recommended allocation to stocks in balanced funds in January is at its highest level since 2022, just 1 percentage point away from issuing a contrarian "sell" signal.

Bank of America's indicators do not capture every rise or fall in the stock market, but they have a good track record in predicting the S&P 500 Index's total returns over the next 12 months, similar to the BI index. Whenever Bank of America's sell-side indicator reaches the current threshold or higher, the S&P 500 Index has a positive return only 65% of the time over the next year, with an overall return rate of 82%.

Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, stated in an interview on February 6: "Market sentiment has caught up with this bull market."

However, in her view, this does not mean completely avoiding U.S. stocks, but rather taking a proactive approach, looking for opportunities outside the so-called seven major stocks, as these stocks are overvalued and investors are concerned about their ability to accelerate earnings This year, large technology stock indices have seen a slight decline.

According to data collected by Bank of America since 1930, the U.S. stock market experiences an average of three pullbacks of around 5% each year. If we take historical experience into account, the U.S. stock market has not seen such a significant decline since August, indicating that it is vulnerable to economic downturns.

Subramanian stated, "With market sentiment and valuations high, escalating trade tensions increase the risk of a pullback."