Wall Street's Most Popular Investor Sentiment Survey Just Made Dubious History -- and It Has a Nearly 100% Success Rate of Forecasting Future Stock Returns

There are a lot of ways to invest your money, but none have generated a higher annualized return over the last century than stocks. However, this doesn't mean equities aren't without their inevitable ups and downs.

Over the last two months, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), widely followed S&P 500 (SNPINDEX: ^GSPC), and growth-stock-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) have all declined by a double-digit percentage. More specifically, as of the closing bell on April 21, the Dow, S&P 500, and Nasdaq Composite were 15.2%, 16.1%, and 21.3% below their respective all-time highs. This places the Dow and S&P 500 firmly in correction territory, with the Nasdaq falling into a bear market for the first time in three years.

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When Wall Street's major stock indexes tumble, it's perfectly normal for investors to seek out data points and predictive tools that have strongly correlated with directional moves higher or lower in the Dow, S&P 500, and Nasdaq throughout history. Even though these correlations offer no concrete guarantees, some have a perfect or near-perfect track record of forecasting future stock returns.

Last week, one such Wall Street indicator made dubious history -- and it's actually great news for patient investors looking to take advantage of the stock market's recent sell-off.

Investor sentiment hasn't done this in 38 years...until now

Stock market history being made has become somewhat commonplace in recent weeks. The benchmark S&P 500 logged its fifth largest two-day percentage decline since its inception earlier this month. Likewise, the Dow Jones, S&P 500, and Nasdaq Composite recorded their largest single-session point gains in their respective histories on April 9.

Amid these wild swings, investor sentiment toward the stock market has been shaken to its core.

Since June 1987, the American Association of Individual Investors (AAII) has released the results of a weekly survey that gauges forward-looking market sentiment. Rather than relying on backward-looking historical data, which AAII notes can result in hindsight bias, the AAII Investor Sentiment Survey offers insight into the minds of individual investors to gauge where they see the stock market heading over the coming six months.

Over the last 38 years, sustained periods of bearishness -- defined as AAII Bearish Sentiment coming in above 50% -- have been exceptionally rare. As you can see in the post below on X from Bespoke Investment Group, which has aggregated data from the weekly AAII Investor Sentiment Survey, there were only six instances prior to 2025 where bearish sentiment was sustained for at least four consecutive weeks.

Another record broken...

AAII Bearish Sentiment comes in above 50% for a record 8th straight week. Individual investors as measured by @AAIISentiment have never been this bearish for this long. pic.twitter.com/a2ko95v58W

-- Bespoke (@bespokeinvest) April 17, 2025

The record for sustained bearishness among individual investors had been a seven-week period in September-October 1990, which was during the Persian Gulf War. It was eclipsed last week, with AAII Bearish Sentiment surpassing 50% for an eighth-consecutive week.

The fuel behind this pessimism is undoubtedly the economic uncertainty caused by President Donald Trump's tariff policy.

On April 2, which Trump referred to as America's "Liberation Day," the president unveiled a sweeping 10% global tariff, as well as a slate of higher "reciprocal tariffs" on countries that have historically run trade deficits with the U.S. These higher reciprocal tariffs were subsequently put on a 90-day pause on April 9 for all countries except China.

While the president and his administration appear confident that tariffs will lead countries to the bargaining table and put America in a position of strength, there's a lot that could go wrong with Trump's tariff-driven approach.

The obvious concern is that tariffs could harm the United States' existing trade relations with its allies and other key trade partners, such as China. It's possible anti-American sentiment in overseas markets can harm demand for U.S. goods, or at the very least spark retaliatory tariffs from other countries, including China.

Additionally, the Trump administration doesn't appear to be differentiating between output and input tariffs. Output tariffs are placed on a finished good being imported into the country, while an input tariff is a duty placed on a component used to complete a product in the U.S. Input tariffs run the risk of increasing the prevailing rate of inflation domestically, and might make U.S. goods less price-competitive with those being brought into the country.

To make matters worse, the Atlanta Federal Reserve's GDPNow model is forecasting the steepest organic contraction in the U.S. economy, excluding the COVID-19 pandemic years, since the tail-end of the Great Recession in 2009. There are tangible reasons for the AAII Investor Sentiment Survey to be making dubious history.

But there's also a huge silver lining...

Image source: Getty Images.

Extended bearish sentiment is a green light to buy for long-term investors

One of Wall Street's odd quirks is that its darkest days tend to offer the best investment opportunities. Not only are some of its best single-day returns clustered near its largest single-day losses, but investment returns following periods of heightened bearishness tend to be well above the historic average.

Including the present, there have been seven periods where AAII Bearish Sentiment lasted four or more weeks. Here's how the S&P 500 performed on a total return basis (including dividends) at the one-, three-, and five-year mark, respectively, following each prior instance (where applicable):

• Week ended Aug. 31, 1990 (4-week stretch): one-year total return (+26.9%), three-year total return (+57.8), five-year total return (+102.1%).
• Week ended Oct. 26, 1990 (7-week stretch): one year (+30.4%), three years (+67.1%), five years (+119.3%).
• Week ended Jan. 24, 2008 (4-week stretch): one year (-37%), three years (+2.2%), five years (+23.6%).
• Week ended July 17, 2008 (4-week stretch): one year (-23.4%), three years (+11.7%), five years (+49.1%).
• Week ended March 12, 2009 (4-week stretch): one year (+56.5%), three years (+94.4%), five years (+176.8%).
• Week ended Oct. 20, 2022 (5-week stretch): one year (+17.2%).

One year later, the benchmark S&P 500 was higher on a total return basis 67% of the time, yielding an average return of 11.8%.

Meanwhile, in the instances where three-year and five-year total returns can be measured, the S&P 500 was higher 100% of the time. The average three-year total return following a period of extended bearishness is 46.6%, while the average five-year total return is a blistering 94.2%.

To put these figures into context, the average annual return for the S&P 500 over the long run has been closer to 10%. But following periods of excess individual investor bearishness, the benchmark index has been delivering a compound annual five-year growth rate of more than 14%.

While short-term movements in the Dow, S&P 500, and Nasdaq Composite are likely to be volatile and unpredictable as President Trump's tariff policy evolves, historical correlations have accurately forecast higher future returns with a nearly 100% success rate.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.