The U.S. Stock Market is Near Record Highs. What is Causing Investors to Be So Worried?

Investors are increasingly concerned that the stock market’s strong run over the past two years may be losing momentum. A series of sentiment indicators suggest growing uncertainty about the market’s future direction.

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According to the latest data from the American Association of Individual Investors, the eight-week moving average of bullish sentiment has dropped to 33.9%, marking its lowest level since November 2023. Meanwhile, bearish sentiment remains elevated above its long-term average, though it has dipped slightly from its peak last week. Similarly, BofA Securities’ bull-and-bear indicator registered a reading of 5.3 on Friday, slightly up from the previous week but still in neutral territory. A score of 1 would indicate extreme fear, while 10 would signal euphoria.

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Additional sentiment measures, including some highlighted by a Vanguard strategist in research shared with MarketWatch, also reflect heightened market anxiety. Stocks ended lower on Friday, with losses accelerating in afternoon trading. By the session’s close, U.S. stocks had recorded their steepest daily decline of 2025, according to FactSet data. The downturn was largely attributed to disappointing economic data, including weak consumer sentiment and signs of softness in the services sector, which reignited concerns about the economy.

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Despite the selloff, the S&P 500 was trading at record highs just two days earlier. While the market’s momentum has slowed, several high-growth stocks such as Palantir Technologies and AppLovin remain in positive territory. However, most of the “Magnificent Seven” tech giants have shown signs of faltering, except for Meta Platforms, the parent company of Facebook.

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For investors holding index-tracking funds, the downturn has been less noticeable. Other stocks have been rising, helping to offset the weakness in the Magnificent Seven, which has softened the impact on major indexes like the S&P 500 and Nasdaq Composite.

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A key point of confusion lies in the disconnect between investor sentiment and actual market behavior. While the rally has slowed, economic fundamentals remain strong. Corporate earnings have met expectations, with fourth-quarter results reflecting solid profit growth. Next week, a new report on the U.S. economy’s performance in late 2024 will provide further insights.

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Still, several factors are fueling investor anxiety. Concerns range from lofty stock valuations to political uncertainty in Washington. While stocks have avoided a major correction so far, their ascent has become less pronounced.

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Kevin Gordon, a senior investment strategist at Charles Schwab, noted a divergence between negative sentiment and bullish positioning. However, Friday’s steep losses may signal a shift in this pattern. It remains to be seen whether the downward momentum will carry into next week.

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Adding to the uncertainty are President Trump’s policies on trade, immigration, and relations with global adversaries like Russia. While the current economic outlook remains stable, some worry that the administration’s actions could have unintended economic consequences. Apollo economist Torsten Slok recently questioned whether the administration’s firings of federal employees could tip the economy into a recession.

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Beyond politics, other risks are emerging. Rising egg prices have reignited inflation concerns, which were evident in Friday’s University of Michigan consumer sentiment report.

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On Saturday, investors will closely watch Warren Buffett’s Berkshire Hathaway as it releases its earnings report and Buffett’s annual letter to shareholders. With Berkshire’s cash reserves exceeding $300 billion at the end of the third quarter, many are eager to see if Buffett has deployed any of that capital into the market. His reluctance to invest more has contributed to concerns that stock valuations are overstretched. Some analysts argue that equities look expensive by historical standards, making them vulnerable to any negative surprises.

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Despite these concerns, investors have not significantly pulled money out of the market. While inflows into U.S. equity funds have slowed compared to late last year, capital continues to flow into stocks, according to EPFR data. However, some investors have begun shifting funds toward defensive assets like gold and bonds.

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At the same time, Bank of America’s survey of investment managers indicates that cash allocations remain at extremely low levels. Gordon mentioned that he has been fielding more inquiries from clients about the potential impact of Trump’s immigration policies on the labor market, particularly in the agricultural sector.

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Market uncertainty appears to be growing, with worries spanning trade, immigration, and other policy concerns. “There has been an increasing level of anxiety about developments in Washington,” Gordon said.

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That said, a degree of market skepticism can sometimes be beneficial. There’s a long-standing belief on Wall Street that stocks often rise despite widespread concerns, climbing what’s known as a “wall of worry.” Fundstrat’s Tom Lee pointed out in a Friday note that past downturns in sentiment indicators have sometimes preceded further stock market gains.

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Still, some experts caution that investors may not be adequately prepared for a selloff. A sudden drop could trigger a sharp reaction, especially since options traders have continued to favor bullish call options. Meanwhile, the Cboe Volatility Index, or VIX—Wall Street’s so-called “fear gauge”—remains relatively subdued. It finished Friday at 18.45, below its long-term average of around 20, even as stocks tumbled.

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Friday’s market drop may have been exacerbated by the expiration of nearly $3 trillion in options contracts, which could have intensified selling pressure.

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“Even though there is nervousness, nobody is hedged,” said Farzin Azarm, managing director of equity trading at Mizuho Americas.

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By the close of Friday’s trading session, the S&P 500 had fallen 104.39 points, or 1.7%, to 6,013.13. The Nasdaq Composite dropped 438.36 points, or 2.2%, to 19,524.01. The Dow Jones Industrial Average slid 748.63 points, or 1.7%, to finish at 43,428.02.

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