Bullish sentiment on stocks has cratered. Why that could be good for stocks

The S&P 500 fell nearly 2% last week, its steepest one-week decline since June, while Wells Fargo’s sentiment gauge crossed -1 and Macro Risk Advisors’ score dropped to about 27 from roughly 61; Goldman Sachs said hedge funds sold tech at a record pace. Wells Fargo’s gauge now signals a potential buy: since 1998, the S&P 500 has averaged a 2.4% return in the month after sentiment reached similarly bearish levels, with stronger returns over the following three, six and 12 months. Wells Fargo nevertheless expects choppy trading into year-end and range-bound semiconductors, citing decelerating profits and negative liquidity as risks.

Analysis

The useful signal is not simply “bearish sentiment = buy.” It is that positioning may have become less of a near-term headwind just as the market’s underlying earnings and liquidity risks remain unresolved. A rebound can therefore be sharp, but does not by itself validate the financing economics of AI capex. The key distinction is between broad equity risk appetite and the narrower question of whether AI infrastructure spending earns adequate returns.

Over days to weeks, reduced selling pressure could lift broad indices even while AI-linked leaders lag. Over 1–3 months, earnings revisions, credit spreads and funding conditions should determine whether a sentiment bounce broadens or fades. Over 6–18 months, weaker returns on data-center investment could shift capital from chip and infrastructure suppliers toward less capital-intensive beneficiaries—or constrain the spending cycle itself. The historical sentiment backtest cited is a conditional indicator, not evidence that today’s earnings or liquidity setup matches prior episodes.

The contrarian risk is treating hedge-fund selling as proof that supply is exhausted: the article provides no evidence on remaining exposures, investor flows or forced deleveraging. There is no direct single-name implication for GS or WFC from their cited research. A bullish thesis weakens if earnings expectations fall further, credit spreads widen, or the market fails to stabilize despite the bearish positioning signal.

Key Decisions for Investors

• Avoid chasing the first relief rally. Consider a small, defined-risk 1–2 month SPY call spread only after the S&P 500 stabilizes and credit spreads stop widening; risk is limited to premium, with the objective of capturing a positioning-driven rebound rather than underwriting a new bull trend.
• For a relative-value expression over 1–3 months, consider long RSP versus short SMH in matched dollar exposure: this targets a broader-market catch-up while respecting the cited risk of lower highs in semiconductors. Reassess if semiconductor earnings revisions improve and SMH begins sustained relative outperformance.
• Keep gross exposure modest until flow and fundamentals confirm the signal. Track breadth, fund flows, credit spreads and AI-capex guidance; persistent outflows or deteriorating financing conditions would falsify the “selling is largely done” premise and argue against adding index upside.
• No standalone trade in GS or WFC is warranted from this article: their role here is as sources of sentiment analysis, not evidence of a change in either firm’s earnings outlook.