Investor Enthusiasm Hits Record Levels... But You Shouldn't Sell

The key to happiness is low expectations...

That's a mantra I've lived by for most of my adult life. You see, disappointment is simply a matter of expectations...

It doesn't matter how good an outcome is. You could be having a five-star experience... But if it falls short of what you expected, it's harder to enjoy. It's difficult to be happy when you're always hoping for something better.

This expectation game can improve your day-to-day life. And it can help you understand the markets better, too – because markets are all about expectations.

Unfortunately, investors expect a little too much right now. And that overexuberance is something to keep a close eye on in 2025.

Let me explain...

Expectations don't come out of nowhere. It's human psychology. When good stuff happens – and then keeps happening – we expect that trend to continue.

This cycle has played out in the current bull market. As prices rise, folks get more excited. Sentiment improves... And everyone begins to expect the good times to get even better.

It creates the relationship I've written about over and over again...

Sentiment follows prices.

So it's no surprise that folks are excited about stocks right now. We just finished a second consecutive year of incredible gains. And in November, folks had the highest expectations on record for the market.

That's according to data from The Conference Board – a nonprofit business membership organization. The Conference Board has collected data and built indexes for decades. It's most famous for the Consumer Confidence Index... But it does a lot more, too.

One of the datapoints The Conference Board collects from its members is about stock expectations. Specifically, it asks if folks expect stocks to be higher, lower, or the same over the next 12 months.

Historically, less than half of folks expect stocks to be higher in a year. But recently, expectations hit the highest reading in history. Take a look...

In November, 57.2% of respondents said they expected stocks to keep rising over the next year. And as you can see, that's dramatically higher than we've seen in recent history.

Just a few months ago, less than half of those surveyed expected stocks to keep rising. And a year ago, less than a third of folks were bullish on stocks. Expectations have exploded higher alongside rising stock prices this year.

The good news is that the market shake-up in December has already scared off some of these bulls. The December reading fell to 52.9%, down dramatically from November's reading.

That means folks aren't quite euphoric yet. They're still jumpy... looking for a reason to sell. So I wouldn't call the recent spike anything more than an early warning sign.

It's worth noting that sentiment tends to peak alongside stocks... But it also tends to soar long before the eventual peak.

We saw this in the late 1990s. This measure was hitting multiyear highs in 1996... and 1997... and 1998... before stocks finally peaked in 2000.

It was similar in the 2000s, when a high reading in 2004 showed up years before the eventual peak in prices. And in the 2010s, the high in early 2018 signaled a tough year ahead – but not an end to the overall bull market.

In short, investors had high expectations as we ended 2024. That could be setting them up for disappointment... even if 2025 turns out to be a good year.

It's not enough reason to decide the bull market is over, though. December's market shake-up was enough to scare off a good chunk of bulls. And that gives us a healthy setup as we enter the new year.

Good investing,

Brett Eversole

Further Reading

"U.S. investors had a fantastic 2024," Brett writes. "It may have ended with a gut punch – but don't let that sour how you feel going into this year." Despite 10 consecutive days of losses for one major index, investors can expect outperformance in the year ahead due to this incredibly bullish setup... Learn more here.

"The S&P 500's recent stumble failed to break the long-term uptrend... which means the bull market's momentum is still in place," Sean Michael Cummings writes. Using the wrong metrics to evaluate the market can be dangerous... and lead you to miss out on major gains... Read more here.