When it comes to market bullishness or bearishness, there’s an adage that says, “sentiment follows price,” which has rung true across the last several months. The AAII Sentiment Survey Bull-Bear Spread (AAIISPREAD) moved negative in February, then plummeted in March and April before rallying with the market in May. In total, there were 15 straight weeks of negative sentiment before that ended last week, which is the 5th longest streak of all time. With investor sentiment briefly flipping back to positive territory, should we take that as a sign of better things to come for the market?

For those unfamiliar with the American Association of Individual Investors (AAII)’s surveys, they ask each of their members the direction they feel the stock market is headed over the next six month. The answers range from up (bullish), no change (neutral), to down (bearish). The sentiment spread is calculated by subtracting the percent of bearish respondents from the percent that are bullish. Positive readings mean there are more bulls than bears, with the opposite being true for negative readings.

In the previous four instances of 15-week negative streaks ending, the market performance was overwhelming positive over the next year. Each occasion was in the green three months out while the group averaged a one-year return of 27.4%. One note of caution is that the sixth longest streak of 14 weeks ended in March of 2008, but generally speaking, most streaks of 10 weeks or longer have played out well. The median one-year return for streaks that ended at 10 weeks or longer was 17.4%, along with an 80% positive rate.

Despite a brief return to positive sentiment, the AAIISpread moved back to bearish territory on Thursday at -8.97, which ranks in the third decile historically. In terms of sentiment, there’s a trend of stronger performance during low sentiment periods while high sentiment periods average more muted returns, especially at the extremes. Our current levels have seen solid returns over the next year, with the group averaging a one-year return north of 12.3%. Sentiment can only shed so much light on the market’s outlook, but the generally positive takeaways do align with positive technical picture for domestic equities, including strong readings from long-term participation (^PTSPX) and our core market percentile rank. 

With almost all of the S&P 500 (SPX) companies having released their 2025 Q1 earnings report, today we wanted to review how stocks behaved based on their technical rating. For instance, did stocks with a high technical attribute (TA) rating beat fundamental analyst estimates more frequently than low TA stocks? Did high TA stocks behave better on their earnings date compared to low TA stocks? Were there more technical upgrades in certain sectors compared to others?

Before answering these questions, we should first give a brief overview of our ratings for those unfamiliar. Note that we will often use the terms technical attribute, attribute, and rating interchangeably. If you are a veteran, go ahead and skip to the “High Attributes vs Low Attributes on Estimates” section.

For those still reading, every stock on our system is assigned a rating that ranges from 0 to 5. Stocks with an attribute of 2 or below are considered technically weak and consequently, carry a sell rating. Stocks with a 3 rating are considered a hold, and those with a 4 or 5 attribute are given buy and strong buy ratings, respectively. Our studies show that high rated stocks, which carry a 3 technical attribute or better, have historically outperformed stocks with low technical attribute ratings. Academics attribute this success to the momentum factor. It is a weird phenomenon, but it is as simple as stocks that have gone up the most in the past tend to keep going up the most in the future.

By no means did we discover momentum — we merely provide an objective and quantifiable means to access the factor via our technical attributes. These ratings were not built with the intention of chasing near-term alpha nor should they be heavily relied upon for short-term trading; however, closely rated stocks tend to behave similarly in certain seasons — one of them being earnings season.

High Attributes vs Low Attributes on Estimates

More stocks rated as a hold, buy, or strong buy (high technical attribute, 3+) heading into this earnings season beat fundamental analyst expectations compared to stocks rated as a sell (weak technical attribute, 2 or lower). In fact, 64% of high technical attribute stocks beat top line mean fundamental analyst estimates sourced by FactSet and 83% beat bottom line estimates. Conversely, just 61% of low attribute stocks beat top line estimates and 75% beat bottom line estimates.

The overall percentages/trends at this level are largely in line with last quarters metrics. As usual, more firms beat bottom line than top line across the board. There are a few hypotheses that could explain why beat rates are better for the bottom line compared to the top line. Companies have numerous opportunities to manage their earnings per share via revenue recognition practices, depreciation/amortization decisions, funded statuses for pensions, changes in allowances/provisions for payments, etc. Additionally, many companies have been rather loud about taking a cautious approach to earnings forecasts, suggesting the hurdle rates may have been lower as firms bake in tariff uncertainly and other global concerns.

A technical explanation as to why beat rates could be better for high attribute stocks compared to low attributes relates to market efficiency. The U.S. large cap equity market is arguably efficient, meaning that relevant information is vastly known and quickly priced in. Carrying that idea forward, people want to invest in companies with strong future earnings potential, which means increased demand for the issuer stock, which drives up prices and makes for a high technical rating on our system.

Technical Upgrades and Downgrades

Earnings season still brings surprises, often in the form of big share price reactions. After a large share price reaction, our technical attribute ratings can adjust — we call these changes in rating technical upgrades and technical downgrades. By our definition, a technical upgrade is when a stock gains an attribute —  so a 1-rated stock moving up to a 2 would classify, just as a 4-attribute stock moving up to a 5 would classify. A technical downgrade is the opposite, so it counts whenever a stock loses an attribute rating.

It is important to recognize that just because a stock received a technical upgrade, it is not instantly a high attribute stock worth buying. Recall that a stock that was a 0 and became a 1 is classified as a technical upgrade. Also, note that the chart below does not show maintained ratings. So, a 5 attribute stock that had a positive earnings surprise is nowhere to be seen, just like a 0 attribute stock that may have experienced further downside. Nonetheless, interesting trends emerged. We pulled data as of Thursday (5/29).

Sector Highlights:

• After seeing no technical upgrades in the previous quarter, the Real Estate sector earned the highest proportion of technical upgrades. The largest positive earnings reaction came from Camden Property Trust (CPT), which advanced over 5%.
• After last quarter saw technology firms see more technical downgrades than upgrades, the first quarter of 2025 saw technology’s results storm back. Nearly 20% of technology firms saw some sort of technical upgrade following their earnings (following Real Estate and Materials.)
• Communication Services led the way in this study over the last two quarters. Despite falling out of the top spot, 13% of the sector still earned a technical upgrade- while none of the sector lost favor this quarter. Comm Services remains a top-dog as we wrap up Q2.
• No sector saw more than 10% of their constituents lose technical attributes this quarter. Two sectors saw more stocks lose attributes than gain them, that being energy & consumer discretionary. NKE was a loser, slipping nearly 5.5% after reporting results.

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