Stock Market Outlook Plunges as Investors' Tariff Fears Grow

Investors are feeling overwhelmingly negative about the current state and future direction of the stock market.

According to the American Association of Individual Investors' weekly Sentiment Survey for the week ending Feb. 26, 60.6% of respondents reported a bearish outlook. For context, that is the highest bearish reading since the survey registered 60.81% on Sept. 29, 2022, at the tail end of the last bear market.

"The surge in bearish sentiment has been even more dramatic than the collapse in bullish sentiment," Bespoke Investment Group wrote in a message to subscribers, indicating that the jump in bearishness was the largest weekly increase since August 2019.

Meanwhile, CNN's Fear & Greed Index is currently registering "Extreme Fear." The jump in negative perception is permeating all corners of the market and coincides with the current pullback that has seen the S&P 500 lose 4.13% since hitting its all-time high last week.

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Why investors are bearish

With President Donald Trump announcing that tariffs against Canada and Mexico will go into effect next week while simultaneously threatening to levy tariffs against the European Union, the market recoiled and posted its fourth consecutive losing day.

The president's rhetoric on tariffs, according to Investor's Business Daily, "is undercutting an S&P 500 rally." Leading up to the pullback, the market had gained 1.57% since Trump took office.

A recent Charles Schwab client sentiment survey suggests that concerns with overvaluation are also prevalent, with two out of three traders believing that the market is currently overvalued, citing mega-cap tech and AI stocks among the culprits.

In many instances, stock valuations are exceeding companies' earnings, leading to market prices that have become significantly higher than what profits justify. As measured by the price-to-earnings (P/E) ratio, the S&P 500 is currently approaching levels not seen since April 2020 — at the start of the COVID-19 pandemic — and September 2008, preceding the Great Recession. The market's current P/E ratio of 29.82 is more than 51% higher than its five-year low of 19.17 in September 2022.

Looking at the P/E ratios of some Magnificent Seven stocks demonstrates how divorced share prices have become from earnings. Nvidia, for example, has a current P/E of 51.63, meaning investors are paying $51.63 for each dollar of the company's earnings. Tesla's current P/E ratio of 142.55 is magnitudes higher.

A softening economic environment is also contributing to bearish investor sentiment, with consumer confidence hitting a four-year low, unemployment claims reaching a three-month high and inflation having risen each month since September.

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