The FED raised interest rates. For the first time since 2023.
And at the same time, ordinary investors turned sharply bearish, with 53% expecting the market to fall over the next six months. Yes, you read that correctly. More than half.
And yet. The S&P 500 closed Friday at 7,650.50 points. Almost exactly where it was. In other words, there is panic in the words, but not in the numbers.
WHAT THE FED DID
On Wednesday, the FED unanimously decided to raise interest rates. And it doesn’t stop there. In their projections, officials included another rate hike in 2026. The market, however, does not fully believe them. Fed funds futures are pricing in a 42% probability of two more hikes, according to the CME FedWatch Tool.
“And what does this mean for stocks?” you may be wondering.
Theoretically, it is bad news. More expensive borrowing and future earnings becoming worth less today. In practice, though? The market absorbed it. The S&P 500 and the Dow ended the week lower, but the Nasdaq posted its third positive week in four, with technology stocks doing the heavy lifting.
“As long as growth more than offsets the rate increases, stocks can continue to rise,” says David Miller of Catalyst Funds.
Of course, there is a big “but.” Bond yields remain high. Oil is above $100 as the war in the Middle East drags on. And the US is entering a politically charged period ahead of the midterm elections.
THE BEARS ARE TAKING A POSITION
And this is where things get even more interesting.
The weekly AAII survey showed 53% bearish sentiment. That is a 14-point increase in one week, the highest level since May of last year. And the bulls? Less than 29%, the lowest level in a year.
What are they worried about? Oil rising again and the 10-year US Treasury yield approaching 5%. In fact, JPMorgan’s commodities team threw up its hands on Thursday and announced that it was stopping its attempts to predict when the war with Iran will end. And CNN’s Fear & Greed Index moved into “fear” territory, after showing “greed” just a month ago.
So you might say… does that mean we are heading for a crash?
Not necessarily. And this is where it gets interesting.
Keith Lerner of Truist Wealth says that these exact levels of pessimism usually appear near bottoms, rather than highs. He combines that with the fact that only 30% of stocks are above their 50-day moving average, with the market considered oversold below that level. Even Boockvar, who admits that AAII is his least favorite indicator and that professionals are more optimistic, concludes: “From a contrarian perspective, we are set up for an upside reaction.”
Let’s also look at the other side. Jonathan Krinsky of BTIG sees only 49% of stocks above their 200-day moving average. And Ed Yardeni lowered his year-end target to 7,900 from 8,400. But notice something. Even the lowered target implies new highs from here.
WHAT’S HAPPENING NEXT WEEK
And this is where the big meeting comes in. Trump is meeting Xi Jinping in Washington.
Nobody expects major changes on tariffs or AI. But meetings like this are closely watched because the risk goes in both directions.
If tensions escalate, the US loses a crucial intermediary in the war with Iran. And that could worsen the energy crisis at a time when the White House cannot afford it. But if there is an agreement? Then we are talking about a sudden relief rally.
“I don’t have a crystal ball. I can only look at the incentives… and the economic incentive for de-escalation and an agreement is enormous. This is the moment of maximum negotiating leverage for both sides,” wrote Rich Privorotsky of Goldman Sachs.
GOLDMAN SAYS IT IS NOT A BUBBLE
And now we get to the most interesting part.
S&P 500 companies’ earnings surged by roughly 30% in each of the first two quarters. According to Bloomberg Intelligence, these are among the strongest performances ever recorded. And expectations for the full year are the strongest since 2021.
Naturally, this has sparked discussion about an “earnings bubble.” In other words, that companies are currently earning more than they can sustainably maintain.
The Goldman Sachs team led by Ben Snider calls it “excesses.” A slowdown, not a collapse. Consensus expects +19% in 2027 and +17% in 2028. Goldman is more cautious, forecasting +11% next year, because it expects the boost from AI to fade in 2027, even if investment continues to rise, and expects profit margins in semiconductors to slow.
Even so, Snider sees the S&P 500 reaching 8,700 points within the next year. A 14% increase. And notice where it comes from: earnings growth, not expanding valuations.
There is also a counterargument. Bank of America warns that investors are already positioned too heavily for further gains. And they have one piece of data that gives us reason to think. US equity funds pulled in $64 billion in a single week. The largest inflows in three months.
In other words, people say they are afraid… while simultaneously buying.
