There’s a common market adage that says, “sentiment follows price.” This year appears to be an exception to the rule, as sentiment has remained abnormally subdued despite another solid performance from stocks. The S&P 500 has risen 15% for the third consecutive year, and the index has now reached that level six times in the last seven years. Combating market returns has been the abundance of negative headlines this year, with tariffs, valuations, and a potential bubble weighing on investor confidence.

The American Association of Individual Investors (AAII) surveys its members weekly on the direction they believe the stock market is headed over the next six months, with responses ranging between up (bullish), no change (neutral), or down (bearish). The average percentage of respondents with a bearish stance on the market has been 44% this year, which is the highest of any year outside of 2022 and 2008. That said, the market showed signs of renewed optimism in the most recent survey released on Thursday. Over the last week, just 30.8% of respondents thought the stock market would be lower in six months (AAIIBEARS), down from 42.7% in the week prior. That marks the lowest level since January, a stark contrast to sentiment throughout most of this year

Another gauge of investor confidence is the Bull-Bear Spread (AAIISPREAD), calculated by subtracting the percentage of bearish respondents from the percentage that are bullish. A positive reading indicates more bulls than bears, while a negative reading suggests the opposite. Similar to AAIIBears, the sentiment spread has been abnormally low this year.

Readings above 30 for the spread can signal market euphoria, while levels above 15 indicate above-average bullishness. The last time the sentiment spread was above 15 was in December of last year, which marks the fourth-longest streak without hitting that level. Today’s AAII survey saw the bull-bear spread reach 13.5, meaning the streak could come to an end shortly, but that wouldn’t be a cause for concern. Streaks lasting 40 weeks or longer came to an end in June 2023, November 2020, November 2016, and Jun 2009, all of which preceded above-average returns over the next year.

In addition to the streak, the magnitude of sentiment has been abnormally low, as the bull-bear spread has an average reading of -10.5 this year. That is the fourth-worst period on record, with only 2022, 2008, and 1991 seeing lower sentiment across the full year. Given the pessimistic expectations shown, should investors be worried about a slowdown in 2026?

Typically, investors haven't been great at predicting the future performance of the market. Higher levels of bearishness have actually been associated with better returns, as we’ve explored in previous articles. Thankfully, this same phenomenon extends to sentiment across the full year. There have been six instances since 1988 in which the AAII sentiment spread has been negative on average across a calendar year. Of those six occasions, the S&P 500 has not only been positive in each of the following years but also done so by at least double digits. The average return following those six years is a robust 22.2%, with the minimum coming in at 12.8%. While sentiment can only offer so much context, the pessimism this year does lend credence to the notion that the market’s run of gains is in its seventh-inning stretch rather than the ninth inning, especially with domestic equities still displaying significant relative strength.

Christmas is now just three weeks away. While children are being extra kind to make sure they don’t end up on Saint Nick’s naughty list, investors everywhere are hoping the one thing Santa leaves under the tree is a year-end rally to end 2025. The “Santa Claus Rally” refers to the historically positive tendencies for the markets in the last trading days of the year and the first few days of the new one. The exact timeframe encompasses the last five trading days of the current year as well as the first two of the New Year- or a combined seven days in total. As we’ve discussed at various points, the back half of December is typically a strong period, due especially to the visit we often get from our jolly old friend in a big red suit. While no one theory can tie down the exact reason for the rally, the idea is generally accepted to be an air of happiness and cheer on Wall Street. A slightly more practical reason could be from the need for end-of-year tax positioning or the idea that larger institutional investors have gone on vacation, leaving optimistic retail investors to invest their extra Christmas money in their favorite stocks or funds.

See below for the historical return tendencies for the S&P 500 for this seven-day trading period since 1957, shown from strongest to weakest returns. 

Whatever the reason for the Santa Claus rally, history has shown a tendency for strongly positive returns. On average, the rally has produced a return of 1.05%, not bad for a calendar week of trading. Furthermore, the “batting average”, or percent of the time we see a positive return during this week is perhaps more impressive, coming in at a near 72% hit rate. The largest Santa Claus rally came in 2008 at 7.45%, a few months before the 2009 rally off the GFC lows. This positive tendency for more pronounced year-end rallies after poor market years seems to be evident, with the three most fruitful visits from Saint Nick coming in years when (SPX) was down more than 10%. Unfortunately, this wasn’t the case in 2022, when our lackluster trading year ended with a lump of coal in our stocking…the S&P slipped 0.54%.

But what if the market is already on the “nice” list to start the rally? Does Santa reward a productive trading year where the market is already up significantly as is the case this year? While we already mentioned the historical averages following poor years to be slightly higher than those of better ones, a glance at Santa Claus rallies during strongly positive (>10%) years reveals a different kind of present left under the tree. While the magnitude of the Santa Rally is not as strong as in those years with ”poor” returns (1.17% vs. 2.73%), the batting average is significantly higher than the “average” year, with positive returns landing in the stocking nearly 86% of the time. The chart below shows 10%+ years, with the best return coming in 1991. Last year marked just the sixth time since 1958 that Santa didn’t deliver a rally in a year that produced double-digit gains and the first time it has happened in back-to-back years.

Daily Option Ideas for December 4, 2025