AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Week four of the ongoing Government shutdown negotiations, CPI data, and Q3 earnings from Tesla, P&G, GE, Coca-Cola, Netflix, IBM, AT&T, Verizon, and Intel.
• Europe: PMI and consumer confidence data for the Eurozone, inflation and retail sales data for the UK, and Germany’s producer prices.
• APAC: China’s Q3 GDP data and the Communist Party’s Fourth Plenum and any fresh policy signals or reviews of the government’s 15th Five-Year Plan proposal. Japan trade and inflation data, as well as any development in forming a new government.
• Global: Any escalation/de-escalation in the US-China trade dispute.

Investor sentiment weakened further last week, turning negative in four major markets—China, Europe, Japan, and the US—while remaining neutral elsewhere. Although the initial shock of the Liberation Day tariffs and related trade war concerns has eased, these issues continue to weigh heavily on investors’ minds. Some countries, including Japan, Canada, the UK, and the EU, have complied with the Trump administration’s demands by offering non-reciprocal trade terms. Others, such as India, China, and Brazil, have resisted, adding complexity to the global trade landscape. With no cohesive global trade framework currently in place, forecasting has become more difficult, and this lack of confidence is dampening investors’ appetite for risk. Given the strong market performance so far this year, sentiment now reflects a cautious, ‘better safe than sorry’ approach as we head into the final months of the year.

The Q3 earnings season is now in full swing, with the AI theme and Big Tech still expected to deliver the bulk of the upside surprises. According to FactSet, the Magnificent Seven are projected to post YoY earnings growth of 14.9%, compared to just 6.7% for the remaining 493 companies in the S&P 500. While the potential of AI is undeniable, it’s still too early to say whether each company’s implementation of this technology is a foolish idea or a ‘visionary’ one – which is what investors later call a foolish idea that worked anyway.

Markets typically suffer through one surprise correction a year, and after Liberation Day, investors were under the impression that this year’s was already in the books. But then again, maybe not. Or, maybe this year they’ll be awarded two. With that possibility in mind, risk appetite appears to have shifted toward downside protection. What were once trending markets over the summer—driven by conviction, bold bets, and a surge in dispersion—have now given way to a more cautious tone. Investors are increasingly favoring selective bargain hunting and reverting to short-term profit-taking, feeling that even the edge of the AI opportunity is razor sharp.

The year's final two months are packed with political developments in the US, UK, and Japan, Supreme Court decisions in the US, possible Trump-Xi trade talks, and potential Trump-Putin peace discussions—all events that could significantly influence investor sentiment. In the US, the issue of Fed independence has been punted to next year, but will be top-of-mind in Q1 for investors. 

For now, investors are focused on rewarding companies that deliver positive earnings surprises and punishing those that fall short, while largely tuning out political and geopolitical noise. Still, the shift in sentiment - from bullish over the summer to neutral or even negative now - shouldn’t be overlooked. This year, investors pursued what they wanted: bold bets and big returns. But as the year winds down, they’re pivoting toward what they need: realized gains. As risk appetite declines, risk-taking is giving way to profit-taking.

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.