U.S. stocks: Very low sentiment readings tend to be contrarian indicator, UBS says

Investing.com -- UBS analysts believe that despite recent market volatility, the U.S. equity bull market remains intact, with historically low investor sentiment potentially signaling upside ahead. 

"Very low sentiment readings tend to be a contrarian indicator," UBS stated, noting that stocks have historically performed well following periods of investor pessimism.

According to UBS, only 19% of respondents in last week's American Association of Individual Investors (AAII) survey expected stocks to rise over the next six months—one of the lowest readings since the survey began in 1987. 

"Based on historical data over the past 38 years, when less than 25% of respondents to the AAII survey were bullish, the S&P 500 average return for the following 12 months stood at over 15%," UBS said. 

This is said to be significantly higher than the 9% average return across all periods, with stocks rising 85% of the time a year later.

The bank says market uncertainty has been fueled by concerns over tariffs, AI disruption, and economic policy shifts. 

"President Donald Trump said his proposed 25% tariffs on Mexican and Canadian goods will take effect this week, alongside an extra 10% duty on Chinese imports," UBS noted. 

However, the firm expects "bilateral negotiations between the US and its trading partners to continue in the background" and believes deals will likely be reached to limit the scale of these measures.

UBS remains optimistic about equities, citing "healthy economic and profit growth, supportive Fed policy, and sustained AI spending."

The firm expects S&P 500 earnings to grow by 8% this year, adding that while volatility is expected, "we believe hedges are worth considering for investors to navigate uncertainty ahead."