“The study of finance is the study of human behavior. The study of emotions. The study of mass psychology. The study of irrationality.” – Jared Dillion, author

If someone told me I couldn’t look at financial markets, individual stock prices, media, or any other financial/economic metric for the rest of my life except for one, which data point would I choose?

I would pick investor/consumer sentiment (and it’s not even close).

How does sentiment apply to investing?

In good market environments (2023, 2024,2025), most investors deem the market as less risky, and the prosperous times will continue uninterrupted.

In poor market environments, (COVID 2020, 2022, spring 2025), most investors deem the market as hopelessly dire, and there’s no path for things to improve.

This is the human psychology default and obviously neither is true.

Why is investor & consumer sentiment so powerful?

• Markets are humans interacting with other humans – in the era of AI, instant information, algorithmic trading, technology; we forget that markets are very much human.
• Markets are mostly rational, but humans can be irrational (making markets occasionally irrational) – an astute investor can do well by studying human behavior during market euphoria and panic to capitalize on mistakes. We can’t predict the next crisis, but we can set our watch to how humans will react.
• Explains future returns reasonably well – empirical evidence would suggest future returns are higher when negative sentiment peaks. The opposite is true; future returns are lower when optimism peaks.
• Sentiment is ridiculously simple (no math needed) – sentiment is everywhere; when your Uber driver is telling you the secret to investing is piling into the best performing AI stocks, it’s probably fair to say market are closer to the cycle peak than the bottom.
• Sentiment is a major investment input for some of the best managers in the world – Warren Buffett’s “be fearful when others are greedy and greedy when others are fearful,” is an example of using sentiment to make investment decisions.

Let’s cover a few Evergreen examples of the power of sentiment and what it means for the current setup…

Source: AAII Sentiment Survey, Creative Planning, Charlie Bilello

The above chart shows AAII Bearish Sentiment (red, the higher the reading, the more pessimistic investors are) and the S&P 500 Index (blue).  We are interested in extremes in bearish readings and how markets responded afterwards.  March 2009 marked peak pessimism for the AAII sentiment survey; the bearish reading perfectly timed the bottom and a multi-decade rally for U.S. stock ensued. Despite all-time highs in early 2026, bearish sentiment has increased substantially.  Those using sentiment as a contrarian signal might conclude markets do not rollover when negative sentiment is so high.

 

The above graph shows future S&P 500 returns over various time frames when University of Michigan Consumer Sentiment is under 56 (current reading ~53).  Going back to 1980, when sentiment is below 56, future 12-month S&P 500 returns are higher 100% of the time with an average gain of 18% (not a guarantee of future performance).  

 

Source: Bespoke Investment Group

The above graph shows the Schwab Trading Activity Index (STAX). This index provides a measure of changes in equity exposure for Schwab retail clients (do-it-yourself investors). Heading into 2022, retail investors were all-in on U.S. equities, reflecting a bullish outlook for the year. The S&P 500 ended up falling about 20% leaving many investors with a heap of regret. Retail positioning in 2026 is not extremely bullish nor bearish.

Sentiment doesn’t have to be formulaic or rigid, there are plenty of “softer” examples.  Tracking Google search trends is one of our favorites…

Source: Google Trends

The above graph shows Google search interest in tariffs over calendar year 2025. Peak search for tariffs in late April 2025 pretty much nailed the bottom for the S&P 500.  What followed was one of the fastest turnarounds in market history, with the S&P 500 gaining 22% in 12 weeks.

 

Source: The Economist

The above graphic highlights several speculative assets, Google search spikes, and following 12-month performance following the search spike.  In the most stunning example, when Google search interest in “.com” peaked in February 2000, U.S. tech stocks lost ~90% of their value the following 12 months. Yikes!

Which brings us to today, search interest in “AI Bubble” spiked November 2025.  Ironically, the tech-heavy Nasdaq index lost ~2% in November.  A contrarian following search interest sentiment would view the massive drop as a positive for AI stocks.

Source: Bespoke Investment Group

Here’s another example from April 2025 during peak fervor of the tariff sell-off…

Source: X.com, Charlie Bilello

The above tweet poll from April 2025 asked if the U.S. economy would fall into a recession in 2025.  Almost 15,000 folks voted with ~67% predicting the U.S. would fall into a recession.  Again, this virtually nailed the bottom in the S&P 500, the market raced higher, and the economy hummed along with no recession.

How can an investor use sentiment to make better decisions?

The power of sentiment plays out in two ways…

During difficult markets, an investor might say, “I’m going to sit in cash and see how this plays out.”

It usually plays out that many of the best days and biggest gains have occurred by the time the skittish investor is ready to get reinvested.

During good markets, an investor might say, “I’m going to sell all my bonds and full send U.S. AI stocks, that’s where the money is.”

The frothy stocks inevitably sell-off and our aggressive investor is left with the pain of regret.

The remedy is simple. When investing seems easy, it might be time to revisit your risk management strategy.

When the thought of investing another dollar in the market makes you want to puke, it might be time to take some risks.

Some of these sentiment indicators are anecdotal (the Uber driver example). Others are unproven but hold weight over recent history (tariff Google search example).  However, there’s strong empirical evidence to suggest sentiment highs (optimism) lead to lower future returns, while sentiment lows (panic) lead to higher future returns.

Many investors overcomplicate the investment process with all sorts of stuff that sounds good, reflects their personal biases or experiences, or assumes a continuation of current trends.

In my opinion, an investor could do much worse than creating an investment process with sentiment as a signal.  If I could choose only one input to make investment decisions, sentiment would be my choice.

Sentiment is an input in Pure Portfolios’ investment process.  If you have any questions about sentiment or want to learn more about how we incorporate sentiment into a rules-based investment process, shoot us a note insight@pureportfolios.com.