The last holdout bears are Democrats, say strategists. Their capitulation could fuel the next leg higher for stocks.

Ned Davis Research strategists contend that the remaining bearish sentiment, predominantly among Democrats, represents the final resistance for equities; their potential capitulation could propel the S&P 500 to its next leg higher. This assessment is made as the S&P 500 nears new record highs, having achieved a rare 20%+ gain in just two months from April lows, a historical anomaly occurring only six times in the past 60 years.

Analysis

Strategists at Ned Davis Research posit that the primary source of remaining bearish sentiment in the equity market is politically driven, specifically among investors identified as Democrats. According to their analysis, a capitulation from this group could provide the necessary fuel for the next upward leg in stocks. This view is presented as the S&P 500 approaches new record levels following a significant recovery from its April lows. The magnitude of this rally is historically notable, as the index has registered a gain exceeding 20% within a two-month timeframe—an event observed only six other times in the last 60 years, highlighting the powerful momentum underpinning the current market.

Key Decisions for Investors

• Investors should monitor sentiment indicators for signs of capitulation among bearish cohorts, as this is presented as a key potential catalyst for further gains in the S&P 500.
• Given the historically rare and rapid 20% two-month advance, it is prudent to assess whether market breadth is healthy or if the rally is becoming overly dependent on sentiment shifts, which could indicate late-cycle behavior.
• Consider the potential for domestic political developments to act as a trigger for the sentiment shift described by Ned Davis Research, either accelerating a move higher or introducing new volatility.