The pessimistic sentiment in the US stock market continues to spread, but historical data shows: it becomes the fuel for the next round of S&P 500 rally.

US stocks continue reaching new all-time highs, yet investors' anxiety remains unresolved. Paradoxically, this widespread caution and skepticism may actually be building momentum for the rally to persist.

The S&P 500 index last week surpassed 7,700 points for the first time, extending a series of record highs. Second quarter corporate earnings grew 32% year-on-year, a pace only seen after major downturn recovery phases.

However, the pace of inflows into passive investment instruments is slowing. In 20 out of the past 25 weeks, the number of bearish investors exceeded bullish ones, and large fund managers' positions still fall far short of reflecting the current robust fundamentals.

The above signals together depict a market landscape dominated by the "cool-headed". Against a backdrop of steady economic and corporate fundamentals, such restraint suggests that potential buyers are still waiting on the sidelines.

Quantitative firm 22V Research points out that there is a serious detachment between current market sentiment and economic fundamentals. Historically, such "excessive pessimism" often signals a rebound; the expected returns for the S&P 500 over the next 1, 3, and 6 months are 1.6%, 5.1% and 7.8% respectively.

S&P 500 constituent companies' earnings grew 32% year-on-year in the second quarter, a historical feat seen only during rebounds following major economic downturns.

Mark Hackett, Chief Market Strategist at Nationwide, commented:

This is arguably the best earnings environment ever; it’s very hard to construct a bearish argument right now.

Yet, position adjustments by large asset management institutions are notably lagging behind the improvement in fundamentals.

According to data compiled by Deutsche Bank, large-cap holdings are currently at the 87th percentile of observations from the past ten years.

Strategist Parag Thatte noted in a client report that this level of positioning usually corresponds to mid-single-digit earnings growth, far below the current actual pace, indicating that institutional investors have not fully priced in this round of profit boom.

Survey data from the American Association of Individual Investors (AAII) shows that in 20 of the past 25 weeks, the number of bears exceeded bulls—a streak unseen since the market response after the Trump administration announced global tariff policies.

Meanwhile, about $31 billion flowed into US equity ETFs last week, slower than the pace of inflows when the S&P 500 set its previous high in early June.

Bank of America’s sentiment survey shows that strategists are currently recommending clients allocate about 56% of assets to equities, below the historical average of around 70% between 1999 and 2007. BofA equity and quant strategist Jill Carey Hall said:

Current equity exposure is not as extreme as in some past cycles.

A pronounced divergence between investor sentiment and market fundamentals has often signaled potential buying opportunities in history.

22V Research strategists point out that the gap between their bull-bear sentiment index and their proprietary composite economic index is at a relatively high level. In a report, firm president and chief market strategist Dennis DeBusschere wrote:

The current reading of investor sentiment relative to economic data suggests future returns will be above normal.

The persistence of skeptical sentiment is not without basis.

Rising interest rates pose a potential threat to corporate earnings, while tensions in the Middle East and the November US midterm elections are both sources of market uncertainty. However, HSBC global equity strategist Alastair Pinder believes:

The market has had multiple reasons over the past weeks to doubt this bull run, but we believe these concerns are increasingly reflected in market prices, while improvement in fundamentals remains underestimated.