Retail investors' pessimism has surged to its highest level in two and a half years, and the downward trend in US stocks may not have stopped yet.

The latest statistics from AAII show that as market sentiment towards the US economy entering a "recession" or "stagflation" scenario drastically heats up, individual retail investors in the US see a surge in bearish sentiment to the highest level in two and a half years, and tech stocks and momentum-based speculative trading show vulnerability. According to survey data released by the American Association of Individual Investors (AAII), in the week ending February 26, the proportion of investors in the bearish camp (believing that the market will significantly decline in the next six months) surged from 40.5% the previous week to 60.6%, compared to a historical average bearish proportion of only 31%. The AAII survey data also shows that the bullish proportion dropped significantly from 29.2% to 19.4%. The gap between bullish and bearish proportions widened to 41.2% (severely skewed towards bearish), compared to 11.3% the previous week. Retail investors in the US have not seen such a strong bearish sentiment towards the future of the US stock market since September 2022 (when the bearish proportion reached as high as 60.87%). The S&P 500 index fell 25% from January to October in 2022, entering a bear market and posting its worst performance in the first half of the year since 1970. To find a period with similarly strong bearish sentiment, one would need to go back to the financial crisis period in March 2009, the bearish proportion reached as high as 70.27%. The 41.2% gap in bearish sentiment is the highest since September 2022 (43.1%), with the previous peak of higher pessimism being 51.4% in March 2009. Amid a significant rebound in Chinese and European stock markets, the US stock market recently experienced a notable pullback, with the S&P 500 index falling 3% from its recent high, but still up 1.3% year-to-date. The Nasdaq Composite Index, focused on technology stocks, presents a different picture, with the "Big Seven" tech giants underperforming this year, causing the Nasdaq to drop more than 5% in the past five trading days and down 1.2% year-to-date, leading to increasing concerns among investors about a bear market oversold situation resembling the burst of the dot-com bubble. The US bond market may be implying clues to the prevailing pessimism. The 10-year US Treasury yield has dropped from nearly 4.8% in January to around 4.3%. With rising inflation expectations, the decline in bond yields seems more like a pessimistic expectation of US economic growth, possibly bringing back discussions of a US economic recession to the forefront. The latest US Consumer Confidence Index released by the Conference Board has fallen below 80 (typically signaling economic weakness), but as indicated by the once again inverted US Treasury yield curve, such signals are far from certain to materialize. A typical recession warning signal is flashing in the US bond market the 10-year US Treasury yield falling below the 3-month US Treasury yield, known as an inverted yield curve. Over the past few decades, this warning signal has a reliable track record in predicting economic recessions (around 12-18 months after the signal appears), but it is not a surefire indicator of a recession. Pessimism towards stagflation is also on the rise in recent times, with January CPI and PPI both exceeding expectations, and Americans' long-term inflation expectations reaching the highest level in nearly 30 years. The latest inflation expectations for February from the University of Michigan show that consumers' 5-10 year inflation expectations have reached 3.5%, the largest month-on-month increase since May 2021, and a new high since 1995. Respondents are generally concerned that Trump's tariff hikes will lead to price increases. The US Composite PMI has dropped from 52.7 in January to 50.4, reaching a new low in 17 months. More pessimistic data reveals that the vital and extensive service sector activity in the US has shrunk for the first time in over two years, with the service sector PMI initial value at 49.7, entering the contraction zone, significantly lower than January's 52.9, reaching a new low since January 2023. All of these factors contribute to the recent significant increase in expectations for stagflation in the US economy.