This stock-market sentiment gauge hit a level not seen in over 2 years. But Jefferies says it isn’t a ‘golden indicator’ to the upside.

But a strategist at Jefferies thinks the survey isn’t a “golden indicator” of stock-market upside, and argues it also hasn’t always translated to solid performance.

Optimism in the stock market increased 10.4 percentage points to 51.4%, reaching the highest level since April 2021 in the week to Wednesday, the AAII Sentiment Survey showed. That was the seventh consecutive week of bullish sentiment above its historical average of 37.5%, its longest above-average streak since May 2021.

The divergence between stock-market bulls and bears shot up 14.7 percentage points to nearly 30% last week, reaching an “unusually high level,” according to the survey. That indicates a growing gulf between investors who feel optimistic about stocks going forward, versus those who expect equities to fall.

See: The U.S. stock-market rally seems unstoppable, so why does bearishness still persist?

However, Andrew Greenebaum, senior vice president of equity research product management at Jefferies, said he doesn’t consider the widening bull-bear spread a “golden indicator” of future gains for the stock market, and argued the survey has done a “poor job” of signaling tops.

“What it does do, in either direction, is providing a precise picture of what has already happened [in the stock market],” said Greenebaum in a Saturday note. 

It also hasn’t exactly translated to solid performance, said Greenebaum. Among all of the times when the bull-bear spread has hit the 30%-level in history, the average performance of the S&P 500
SPX,
+0.40%
in the following 12 months is over 100 basis points lower than the all-time average of the large-cap index, he said.

“Obviously that isn’t a reason to cut bait, but it does mean that there is likely more-than-typical goodness already baked into shares,” said Greenebaum. 

Irrespective of if the U.S. economy is headed for a recession, the Jefferies strategist thinks the stock market’s 2023 rally is mostly based on corporate fundamentals that already have weakened. 

Revisions to earnings-per-share (EPS) of the S&P 500 showed some cheerful signs earlier this year as the EPS “revision ratio” for the large-cap index exceeded 1 in May, for the upcoming fiscal year between January and December 2024. That level is viewed as a positive, because it signifies upward revisions outnumber downward.

However, after spending a very brief amount of time above 1, the ratio slid back below 0.75 in July. The divergence is notable, especially on a historical basis, according to Jefferies (see chart below).

“Not only has the SPX revision ratio slunk back below 1, which is indicative of more negative revisions than positive, but it’s already back to the 33rd percentile looking back as far as we have data… from the 68th as recently as May,” Greenebaum wrote. 

While it’s still early days for second-quarter earnings seasons, results so far have been looking “fairly average,” which is worse than last quarter, said strategists at Jefferies. 

With 18% of S&P 500 companies reporting actual results, 75% of them have reported a positive EPS surprise, which is below the 5-year average of 77%, according to FactSet data.

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The S&P 500 gained 18 points, or 0.4%, to end at 4,554 on Monday afternoon. The Dow Jones Industrial Average
DJIA,
+0.52%
advanced 183 points, or 0.5%, to 35,411, while the Nasdaq Composite
COMP,
+0.19%
rose 0.2%, according to FactSet data.