Recently, the atmosphere on Wall Street has shown significant shifts, reflecting a growing sense of uncertainty about the future of the American economyOnce buoyed by optimism in November, the market now faces headwinds that threaten to suppress investment enthusiasm.

Since early 2025, signs of changing market sentiment have become evidentOn Tuesday, investors witnessed notable indicators of this transformation as the S&P 500 index experienced its fourth consecutive day of decline, marking the longest losing streak since January 2. This drop has sparked discussions about whether the previous high valuations in certain sectors, particularly technology, have become a source of anxiety among investorsMajor tech stocks, including Palantir Technologies,have seen significant declines that further fuel concerns about their inflated valuations.

Lori Calvasina, the head of U.S. equity strategy at RBC Capital Markets, recently noted in a report that the overall “mood” of the market seems to be deterioratingIn an interview, Callie Cox, the chief market strategist at Ritholtz Wealth Management, echoed these sentiments, saying, “There are many reasonable reasons for the declining market sentiment.”

This decline in optimism is in stark contrast to the earlier expectations regarding U.S. government tax cuts and relaxed regulationsAs geopolitical tensions and concerns over immigration policies emerge, worries about tariffs potentially hampering economic growth and contributing to rising prices have taken center stageThe specter of “stagflation”—a combination of stagnant economic growth and high inflation—has resurfacedNotable investors, including Steve Cohen, owner of the New York Mets and founder of Point72 Asset Management, have warned of a possible short-term market correctionA recent report showed that the consumer confidence index hit an eight-month low, serving as a catalyst for the downward trend in the stock market.

According to the latest weekly survey from the American Association of Individual Investors (AAII), the investor sentiment index recorded a score of -18.9 for the week ending February 20, 2025. With pessimism making up 46.3% and optimism at just 27.4%, this significant divergence of 18.9 percentage points marks the highest level of disparity since November 2023, when it was measured at -21.3. This data reflects an ongoing trend of rising cautious sentiment that began in the fourth quarter of the previous year, stemming from sustained worries over high interest rates, geopolitical risks, and pressures on corporate earnings

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It is significant to note that historically, when the AAII sentiment index reaches a critical threshold of ±20, the market often sees a phenomenon known as mean reversionAn analysis of data since 2000 reveals that when pessimism exceeds 18, the average return of the S&P 500 in the subsequent three months was 4.2%, notably outperforming the benchmark rate of 2.8%.

Despite the short-term indicators flashing caution, some structural support persists in the marketAccelerating stock buyback plans—estimated to total $220 billion for S&P 500 companies in Q1 2025—combined with expectations for a soft economic landing provide a level of backing for stocksAnalysts caution that the potential for a sentiment reversal may present opportunities for a technical rebound.

Defensive stocks like healthcare and consumer staples have emerged as the strongest performers within the S&P 500 since the start of the yearIn contrast, the Roundhill Magnificent Seven ETF, which tracks major technology stocks, has slipped into a correction phaseThe Cboe Skew Index recently surpassed 183, reaching its highest level since 2005, indicating a surge in demand for bearish options linked to the S&P 500 and reflecting investors’ growing trepidation regarding the stock market's future trajectoryMeanwhile, yields on 10-year U.STreasury bonds fell to their lowest levels of 2025, illustrating a market increasingly concerned about economic prospects rather than inflation easeChris Rupkey, chief economist at FwdBonds, stated: “The sharp drop in bond yields suggests the market is detecting signs of an impending recession.”

The unexpected economic index in the U.S. recorded negative values for the fourth consecutive day, with a reading of -12.7 as of February 26, marking a three-month lowDisaggregated data revealed a significant downturn in service sector activities, with the ISM Non-Manufacturing PMI dropping from 52.3 in January to 49.8, signaling contraction for the first time since August 2024. Correspondingly, consumer confidence has also deteriorated, with the University of Michigan's preliminary reading plunging from 95.2 to 89.5, as expectations for inflation over the next year surged to 3.8%, the highest rate observed since November 2024. Although the Atlanta Fed's GDPNow model revised its Q1 growth expectations downward from 2.8% to 2.1%, the core PCE price index remained at 3.2% year-on-year, creating a concerning “low growth, high inflation” scenario.

While market sentiment leans towards caution, several indicators remain relatively stable

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