The Stock Market Is at Record Highs. So Why Is Investor Sentiment So Low?
August has been kind to investors. All three of the major indices recently hit all-time highs, with the Nasdaq accomplishing that feat on Aug. 13, the S&P 500 doing so one day later and the Dow Jones Industrial Average reaching its first record high of 2025 on Friday.
But even though stock valuations continue to surge, investor sentiment is increasingly bearish, with wealthy and everyday investors alike saying in surveys they're wary of the investment landscape.
What's going on?
Stocks' record highs raise concerns
From a market rotation that has seen previously underrepresented sectors joining the rally to an injection of optimism stemming from heightened expectations of an interest rate cut at the Federal Reserve's September meeting, stocks have gotten a boost that largely overshadowed tech's sell-off earlier this month.
Since Aug. 1, the S&P 500 has gained 3.96%, the Nasdaq has gained 4.64% and the Dow has gained 4.56%. That growth, both recently and since the end of the last bear market in October 2022, have raised concerns about the specter of an AI bubble.
But according to David Lundgren, chief market strategist and portfolio manager at Little Harbor Advisors, that's not what we're seeing.
"As we've learned over the past few years, you can have a very expensive market that just keeps going up," he says. " We have a very divergent environment that's been in place for three years now. And despite this rally since the April bottom, most people would be surprised to know that the average stock today is still down over 10% from its 2021 peak."
Still, rumblings of an AI bubble persist. However, Lundgren says there are stark differences between what's happening with AI and, for instance, the dot-com bubble of the early 2000s. Among those are the quality of the companies currently leading the market higher.
" We trust their management," he says. "That's not the kind of leadership you see in a bubble."
Meanwhile, many of the companies involved in the dot-com bubble didn't have earnings or even sales — "just a hope and a dream," he adds.
Beyond misplaced concerns about an AI-fueled bubble, another factor contributing to negative sentiment is the market's concentration. Mega-cap companies like those comprising the Magnificent Seven have resulted in disproportionate weightings of the major indices. The top 10 companies in the S&P 500 now account for more than 37% of the entire index.
"If you have a lot of uncertainty and the market's expensive and concentrated, that's worth worrying about," Lundgren says. "But there's a difference between worrying about something and acting on it."
You'll want to act on it eventually, he he cautions against doing so prematurely. The markets could still return 15% to 20% before those concerns are validated.
Why investor sentiment is so bearish right now
For the latter part of August, investor sentiment has leaned heavily pessimistic. According to the American Association of Individual Investors, which conducts a weekly sentiment survey, the past two weeks have seen bearishness outweigh bullishness 44.8% to 30.8%, and 46.2% to 29.9%, respectively.
That's actually a good thing for behaviorally driven markets.
"That's one of the hallmarks of a valid breakout," Lundgren says. "There's not a lot of belief in it. There's a lot of doubt, a lot of skepticism, and that's kind of what you want."
Lundgren pointed to a 1996 remark from former Fed Chair Alan Greenspan labeling the market "irrationally exuberant" years before the dot-com bubble burst. Abundant enthusiasm can detach valuations from fundamentals.
Given current market conditions, that isn't the case.
" There's quite a bit of bearishness out there," Lundgren says. "But if I had the choice between having a breakout with everybody being euphoric versus a breakout with most people doubting that it's going to continue, I'd rather the latter than the former."
Another factor contributing to negative investor sentiment is lingering tariff-induced uncertainty — a recurrent theme in 2025. So far this year, American consumers have absorbed 22% of tariff costs according to a report published in July by economists at Goldman Sachs. However, that figure is expected to rise to 70% by October.
That could result in weaker consumer spending — a trend that's already being observed in year-over-year data for motor vehicles and parts, sporting goods, bookstores, clothing and furniture, according to Torsten Sløk, chief economist at Apollo Global Management.
"There are emerging signs of weakness in parts of discretionary spending in recent weeks," Sløk wrote on Apollo's website, adding that the adverse impact is evident in "sectors that are impacted by tariffs."
Goldman Sachs' and Apollo's analyses suggest that bearish sentiment could be rooted in the idea that investors are waiting for the other shoe to drop. Despite a strong second-quarter earnings season, financial metrics reflect past performance. Going forward, the market is once again facing tariff headwinds that were paused until President Donald Trump's Aug. 1 expiration date.
But Lundgren believes investors' tariff concerns may be overblown.
"For a systematic long-term trend, I couldn't care less what the Fed is doing, what the Treasury's doing or how much cash Warren Buffett's raising," he says. For buy-and-hold investors, Lundgren says, "just make sure that what you're doing day to day makes sense, and over the long term, you'll win."
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