AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Awaiting the revised schedule of economic reports from US government agencies. Private sector data includes S&P PMIs, ADP employment aggregate, and U-of-Michigan Consumer Sentiment survey.
• Europe: PMIs for the Eurozone, Germany, France, and the UK. UK inflation and retail sales.
• APAC: Japan Q3 GDP and inflation data.
• Global: Potential trade deals between the US and India and Switzerland. A pause/de-escalation in the US-Venezuela hostilities (“bomb or get off the bay”).

Investor sentiment continued to weaken last week, ending bearish in five of the ten markets we track: Asia ex-Japan, Global Developed, Global Developed ex-US, Global Emerging, and Europe. Sentiment in the US was negative, while investors in other markets were neutral. Sentiment in Australia and the UK slipped from positive to neutral, whereas in China and Japan it recovered from the previous week’s negative stance.

Despite this growing pessimism, market returns remained positive, defying the trend in sentiment. The imbalance between the demand and supply for risk is now as strongly negative as it was before Liberation Day. In this environment, investors’ negative bias tends to make them overreact to bad news and underreact to good news (i.e. there is a greater downside risk than upside potential). 

A prolonged US government shutdown has deprived investors of key macroeconomic data, leaving them to speculate. The return of official data in the coming weeks will either validate or challenge the negative expectations reflected in declining sentiment over the past month.

With Q3 earnings season wrapping up, macroeconomic and geopolitical developments are set to dominate headlines. Such events typically push correlations higher, as they affect the broader market rather than individual companies (pay more attention to factor risk than specific risk). 

The next FOMC meeting is 23 days away, and the outlook remains uncertain. Currently, investors slightly favor a pause in the rate-cutting cycle over another 25 bps cut (54.2% vs. 45.8%).

Sentiment has been sliding on fears of an economic slowdown, amplified by heavy leverage in financial markets (looking at you, Private Credit) and historically stretched valuations (looking at you, AI). Further rate cuts could ease some of that leverage pressure, while recent pullbacks in AI-related and crypto plays have already taken some heat out of valuations. 

The question on every investor’s mind: Are we in a bubble—and if so, what could burst it?

On the geopolitical front, potential negative developments in Ukraine and Venezuela may compete for attention with possible positive trade news, including deals between the US and Switzerland and India.
Meanwhile, all eyes are on the Supreme Court’s upcoming ruling on the legality of the Liberation Day tariffs. Other cases drawing investor attention include: Trump v. Cook (impact on Fed independence), and Louisiana v. Callais (focused on gerrymandering).

No decision dates have been set for any of these cases, though the Liberation Day tariffs case is being handled on an expedited basis. Most court watchers expect rulings on all three during the current term—by June 2026 at the latest. Until then, uncertainty around their impact on both the economy and the November 2026 midterm elections is likely to remain high.

In summary, markets are finding support from the pause in the US–China “He started it. Did not. Did too. Did not…” trade war and the Fed’s rate cuts (the ECB has already cut eight times). On the other hand, sentiment is weighed down by economic uncertainty, the lack of transparency caused by the US shutdown, and affordability concerns among voters - issues the Trump administration has so far met with outright denials. 

Unfortunately, none of these questions are likely to be resolved in the short term. Investors will need to adapt to making decisions in an ‘uncertain-for-longer’ environment. 

“Say la vee.” 

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.