The Hated Rally: Investors Cautiousness Despite Market Rally Amid Uncertainties

The stock market has been experiencing a rollercoaster ride in recent weeks, with investors grappling with a myriad of uncertainties that have weighed on sentiment. Despite the recent rally, which has seen the S&P 500 index climb back to near-record highs, investor confidence remains shaky. The Trump administration's tariff rollout and its potential inflationary effects, the Federal Reserve's uncertain rate-cutting path, and renewed geopolitical tensions in the Middle East have all contributed to this uncertainty.

According to data from market research firms, equity exposure remains below historical averages, with mutual funds, hedge funds, and retail traders slowly rebuilding their risk positions. This cautious approach was echoed in Bank of America's latest Global Fund Manager Survey, which showed a sharp drop in risk appetite with a net 28% of investors taking a more-cautious-than-normal level of risk in their portfolios. The survey also revealed that equity allocations remain well below average, currently sitting one standard deviation below their long-term norm.

However, some strategists argue that this caution may be more of a tailwind than a headwind for stocks. "Sentiment can still be negative even with stocks back at all-time highs," said Kevin Gordon, senior investment strategist at Charles Schwab. Gordon described the recent rally as "definitely still hated," but a dynamic that's not unusual following sharp, unexpected sell-offs.

Tom Lee, head of research at Fundstrat, wrote in a recent client note that investors may be overlooking a stronger investment backdrop compared to early 2025, with more clarity on trade and tax policy and a potentially more dovish Fed. "We’re so close to all-time highs, and yet investors are mostly negative still," he said. "This remains one of the most-hated rallies."

Strategists across Wall Street have also grown more bullish on stocks in recent weeks. While the market sell-off in April saw no fewer than 11 Wall Street firms lower their S&P 500 targets, at least eight of those have since raised their bets on where the index ends 2025. The median S&P 500 target now sits at 6,100, signaling further upside potential.

While investors are participating in the rebound, Schwab's Gordon said the gains have been concentrated in sectors outside of Big Tech, which has led the bull market over the past two years. He called out strength in commercial services like logistics and airlines, while more economically sensitive sectors like freight and goods production continue to lag. This points to a more selective rally and could be a contrarian signal that stocks still have room to run. "The pain trade," he added, "is probably still supportive for the equity market to go a little bit higher."