Takeaway #1: Our Tactical indicators Are Still Not Sending a “Hold Your Nose and Buy” Signal
Investor sentiment remains bearish, but still isn’t back to 2022 or 2025 lows. As of 3/26/26, net bulls on the weekly AAII survey were at -17.7% on the weekly update and -14.1% on the four-week average. The latter remains between one standard deviation and two standard deviations below the long-term average. Longer term, we believe this remains good news for the stock market as the four-week average is at a level that has, on average, been followed by a gain of 15.0% in the S&P 500 on a 12-month-forward basis in the past. As of Friday’s close, the S&P 500 was down 8.7% from its late-January high, approaching the outer edge of what we’d consider to be a tier-1 garden-variety pullback (5-10%) on our tiers of fear framework. If we breach 10% on the S&P 500 drawdown, an eventual move into tier-2 growth-scare territory (a decline of 14-20% from the January peak) also seems possible for the S&P 500. In that case, we’d be on the lookout for our AAII indicator to fall to more than 2 standard deviations below average on the four-week average, which occurred in late 2022, spring of 2025, and during the GFC.
Small Caps look cheap, but perhaps not cheap enough. As of Thursday’s close, the bottom-up FY2 market cap weighted median P/E for the Russell 200 had fallen to 14.98x, slightly below the long-term average of 15.2x, but not yet back to the lows of 2022, 2023, and 2025 when it fell slightly below 13x. This is important because Small Caps are commonly viewed as the most cyclical part of the US equity market. Additionally, in recent years Small Cap performance has also become closely linked to investor views on the path of the Fed policy rate, where many have recently had to price out anticipated cuts for 2026.
“Most of the investors we spoke with last week have not been concerned about a significant growth shock in the US emanating from the conflict in Iran and have expected the war to be over soon, though doubts on the latter in particular grew as the week wore on.”
-Lori Calvasina, Head of U.S. Equity Strategy, RBC Capital Markets
The bottom-up S&P 500 forward NTM P/E is also falling rapidly. As of Thursday’s close, this P/E had fallen to 21x, slightly above its own-long-term average of 18.5x, but well below the highs of last fall when this indicator hit +28x. While it wasn’t a helpful bottoming signal in 2023 or 2025, back in 2022 this indicator fell back down to average, helping to mark the low in the broader market.
We’ve been asked what it could take to get the S&P 500 from a tier-1 garden-variety pullback (a move 5-10% below peak) into tier-2 growth scare-drawdown territory (14-20% below peak, roughly the 5,600-6,000 range in today’s pricing). Our review of the other growth scares that have occurred in the aftermath of the GFC (2010, 2011, 2015-2016, 2018, and 2025) suggests these types of pullbacks have involved genuine fear of a recession starting to emerge, in some cases involving an unfamiliar challenge that’s not well understood and seen as potentially getting out of control. Most of the investors we spoke with last week have not been concerned about a significant growth shock in the US emanating from the conflict in Iran and have expected the war to be over soon, though doubts on the latter in particular grew as the week wore on. It’s not clear to us what investors can tolerate in terms of the duration of the conflict (client comments last week were generally one to a few weeks with one telling us a few months), but if recession or severe domestic growth shock fears start to emerge in a serious way, it could be enough to pull the S&P 500 into tier-2 growth-scare territory on a short-term basis.
