AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Possible US Government shutdown and the Jobs report.
• Europe: Eurozone CPI data. A new PM in France.
• APAC: China PMI data. Australia’s RBA interest rate decision. LDP leadership elections in Japan.
• Global: A collapse of the peace process in Gaza, further drone sightings in Europe (NATO), a US shutdown, any further pressures on Fed independence.

Resilient market returns have sparked a sentiment recovery in six of the markets we track — China, Global Developed, Europe, Japan, the UK, and the US — narrowing the gap between market performance and investor sentiment that had widened since early August. In contrast, sentiment remains out of sync with market performance in four other regions: Asia ex-Japan, Australia, Global Developed ex-US, and Global Emerging Markets. Notably, except for the UK, the sentiment rebound was driven more by a decline in risk aversion than by an increase in risk tolerance. This means investors in those markets feel less urgency to protect against downside risk, but that sense of security hasn’t yet translated into a greater willingness to take on risk. As for the four markets where sentiment and performance remain misaligned, investors may still be waiting for stronger reassurance before adjusting their outlook.

Investors are currently contending with an extraordinary level of geopolitical and domestic political uncertainty. Major concerns include instability at the United Nations, stalled peace negotiations in Gaza and Ukraine, increased drone activity across NATO countries, leadership changes in France and Japan, and the looming possibility of a US government shutdown. In addition, ongoing and emerging trade protectionism—both at the country and sector level—continues to add complexity. The fate of the Federal Reserve also hangs in the balance, with a Supreme Court decision expected only in November. Compounding these challenges, there will be little corporate news for the next two weeks, leaving investors in a period of silence until the Q3 earnings season begins on October 13. No wonder investors cannot yet locate their willingness to speculate.

The causes of both the Ukraine and Gaza wars are mired in history, and simply diverting attention from that past won’t persuade the parties to the conflict to envision — let alone embark on — a shared future. Only if the past were razed, the slate wiped clean, could they avoid mistaking it for the future. Still, as improbable as it seems, we try. We claim to see a path to peace, though this vision may arise from the same impulse that leads people to spot Elvis in their local Denny’s.

With geopolitical challenges unresolved, domestic politics stuck in repeated setbacks, and markets already reflecting optimism from the Fed’s future rate cuts and continued strong corporate performance — particularly among companies with AI capabilities — investors will need an exceptional degree of trust over the next two weeks as they wait for confirmation from CEOs.

This environment helps explain why risk aversion is falling faster than risk tolerance is rising: there simply isn’t enough concrete evidence for investors to confidently take on more risk at current valuation levels. For now, markets are pointing to richer valuations yet, and investors are simply nodding along — the way you do when you’ve been given an inadequate explanation and decided to accept it anyway. So each time markets ‘raise’ the bet, investors ‘call’, not raising or folding, just maintaining their cool.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the ten 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.