AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: FOMC interest rate decision, retail sales and industrial production data.
• Europe: BoE interest rate decision and inflation data in the UK. Eurozone trade data.
• APAC: Japan inflation and trade data. China’s industrial production and retail sales data.
• Global: Ongoing trade talks between the US and China, and the EU and India. Any response from the EU to Trump’s request to match his indirect tariffs on India and China for buying Russian oil.

Investors remained hesitant to fully embrace last week’s market rallies, with sentiment ending neutral in five markets and negative in four. Only in Global Emerging Markets did investors show genuine bullishness. Despite lingering doubts about both macroeconomic and geopolitical conditions, the recent divergence between rising market returns and falling sentiment narrowed in four of the markets we track—namely the UK, Japan, Global Developed Markets, and the US. It’s as if the bears investors feared were circling the markets have wandered off, distracted by other concerns. Now, investors are sniffing the air for any lingering trace of bearishness—and finding none. It’s as though the Fed’s expected rate cut has scrubbed their scent clean.

Last week offered anything but clarity for investors. On the macro front, persistent inflation and emerging cracks in the labor market hinted at the specter of stagflation. Geopolitically, Russia’s breach of NATO airspace and Israel’s missile strikes in Doha—a U.S. ally and key participant in the peace negotiations with Hamas—escalated tensions on multiple fronts. Faced with this rising uncertainty, investors responded not with caution, but with a concentrated, stock-specific bet on Oracle, sending the stock up 35% in a single day despite misses on both revenue and earnings. It felt like a variation on the classic “we don’t know”. Have we reached peak AI euphoria? And is Oracle now the new poster child for this bubble, dethroning Nvidia?

The cautious sentiment despite consecutive market highs, suggests a pause in the risk appetite that has been fueling recent market rallies. It is as if having read their investment thesis aloud, investors were now force to digest not only their words but the logic that led to their buying decision in the first place, leading them, if not to change their minds, at least to become acquainted with doubt. 

Somehow, investors have concluded that what is most important in an uncertain setting is to avoid the ridicule of being wrong, and that neutrality is one way to avoid it. They’ve decided that being half bullish and half bearish at the same time is a perfectly reasonable position given the uncertainty they face. Half is fine. Half is legitimate. Half is defendable. There is nothing wrong with the fiftieth percentile. When you don’t know, no more than half is the rule. 

Meanwhile, if you're looking to history for guidance, a comparison of weekly returns for the Top 500 U.S. stocks by market cap shows a striking resemblance between this year (blue line) and 2020 (green line). The correlation stands at 0.83—higher than any other year since 1982 (see new chart below the ROOF Score table).  

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the markets we follow: 

How to Interpret These Charts:

Top Charts:
The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).
• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).
• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:
The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.
• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:
The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.