Be fearful when others are greedy.
—— Warren Buffett
Before April 9, U.S. stocks were close to a technical bear market due to the fading of the &#34;tech exception theory&#34; and economic concerns brought about by reciprocal tariffs. However, in the following two months, U.S. stocks rebounded against the headwinds of the dollar and U.S. Treasury bonds, and have now basically recovered the previous declines. Where does the optimism in U.S. stocks come from?
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<h2>1. Not everyone is optimistic</h2>
Currently, the U.S. stock market is characterized by retail investor optimism and institutional pessimism. In the week of June 12, the proportion of bullish retail investors in U.S. stocks reached 33.2%, the highest since the end of January; the proportion of bearish investors was 33.6%, the lowest since the end of January. Another evidence of retail optimism is the active trading of small-cap stocks, which are often the battleground for retail investors. As of June 18, the trading volume of companies with stock prices below $1 accounted for 36.6% of the U.S. stock market, an increase of nearly 20 percentage points since April 9.
On the other hand, institutional funds in the U.S. stock market are generally pessimistic. According to the CFTC report on E-mini S&amp;P 500 non-commercial options futures net positions, non-commercial traders are typically not hedgers (i.e., they do not use the futures market to hedge existing business exposures), but rather speculative institutional funds represented by hedge funds. As of June 10, the net position of non-commercial options futures in U.S. stocks was -124,000 contracts, at a very low percentile level of 4% over the past year.
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<h2>2. Why are retail investors optimistic?</h2>
The first reason is that retail investors are comfortably enjoying their &#34;TACO&#34; lunch, confident that Trump's debt reduction will ultimately lead to chaos.
Retail investors in the U.S. have their reasons for optimism. On one hand, the measures to reduce the deficit are more noise than substance. As of June 23, DOGE has cumulatively cut spending by $180 billion, leaving 91% of its $2 trillion target still to be achieved. At the current pace, by the deadline of July 4 next year, DOGE will only be able to meet 31% of its target. On the other hand, tariffs are unlikely to directly improve finances. Even though U.S. tariff revenues surged in April and May, the fiscal deficit has not significantly eased, fundamentally because the 10% baseline tariff revenue still struggles to match the trillion-dollar interest expenses in a high-interest-rate environment. The disorderly expansion of finances is not good news for dollar assets in the long term, but it can boost retail investor confidence in the short term
After the &#34;reciprocal tariffs&#34; were postponed on April 9, concerns about a U.S. recession eased, and soft data rebounded from the bottom. Coupled with the tax reduction expectations brought by the &#34;OBBB Act&#34; passing in the House in late May, retail investors naturally looked forward to improvements in corporate earnings during a certain period, even though the real earnings expectations for U.S. stocks have been continuously revised down in the past two months as economic hard data weakened.
Against this backdrop, Trump's relaxation of regulations became another positive factor. The financial industry will reduce compliance burdens and improve capital efficiency due to relaxed capital requirements (such as exempting government bonds from SLR); the energy sector will benefit from the loosening of environmental restrictions, leading to lower extraction costs; and the technology sector is expected to see simplified approval processes for technology promotion, boosting profit prospects.
The second reason is the easing of U.S. dollar liquidity.
Retail investors find it difficult to allocate assets across regions and categories like institutions, and are likely to choose between risk assets and safe-haven assets. Therefore, once sentiment recovers, retail funds will quickly flow into the U.S. stock market, leading to short covering. Driven by gambling psychology and FOMO (fear of missing out), retail investors have become extremely short-sighted, prioritizing making money first and finding reasons later.
After all, the series of policies under Trump 2.0 has yet to break the value logic of tech giants. Recently, the CEO of Oracle stated in an earnings call that &#34;demand is astronomical,&#34; and raised the capital expenditure for fiscal year 2026 to over $25 billion, recharging the myth of AI boosting productivity.
The third reason is the lack of quality alternatives to U.S. stocks.
Even if the market has a bearish sentiment towards the U.S., short-selling behavior has only been reflected in the dollar and long-term U.S. Treasuries so far. Demand for long-term U.S. Treasuries can be replaced by short-term U.S. Treasuries, as well as by European bonds, gold, cash, and other assets. The demand for dollars can also be replaced by non-U.S. currencies, digital currencies, and precious metals. Unlike the dollar and U.S. Treasuries, the equity market lacks quality assets that can replace U.S. stocks, creating a &#34;non-replaceability&#34; moat for U.S. stocks.
For Western funds, the traditional &#34;alternatives&#34; to U.S. stocks are European and Japanese stocks in developed markets. The quality assets in European stocks mainly consist of traditional companies in defense and luxury goods, while the core assets in Japanese stocks are large manufacturing companies in the automotive and electrical sectors, both of which lack growth potential. Therefore, when the &#34;irreplaceable&#34; U.S. stocks fell 20% in the short term, they regained attractiveness.
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<h2>III. Retail Investors vs. Institutions: What Are Their Winning Chances?</h2>
In the U.S. stock market, it is not uncommon for retail investors to collectively confront Wall Street. However, even though social media can enable retail investors to form short-term coalitions, the high concentration of their holdings, high leverage, and the speculative nature lacking fundamental anchoring ultimately determine that such funds are extremely unstable. Due to the overly speculative and short-term nature of retail funds, their winning chances in future market judgments are not high
In the past three years, whenever the proportion of retail bullish investors rises, the U.S. stock market tends to weaken marginally in the following month, with this year being the only exception. A short-sighted market is also fragile; once new concerns arise, a reversal may follow.
Compared to the rapid inflow and outflow of retail funds, institutional funds often serve as a more important barometer for the trends in the U.S. stock market. For most of the past three years, an increase in institutional bullish strength has indicated that the U.S. stock market is about to strengthen in the near term.
According to Bank of America's June global fund manager survey, 57% of respondents believe that non-U.S. stocks will perform the best over the next five years, while only 24% believe that U.S. stocks will perform the best. In terms of positioning, institutional investors currently prefer to overweight European stocks and emerging equities, while they tend to underweight U.S. stocks, the U.S. dollar, and energy commodities. Due to the weakening of the U.S. dollar, foreign institutions face increased losses when investing in U.S. stocks in local currency terms. Unlike the panic-driven withdrawal of foreign capital, domestic capital currently adopts a more cautious attitude towards U.S. stocks.
As consumer demand front-loading and weak hard data become known variables, the pace of Federal Reserve interest rate cuts becomes particularly important. While rate cuts certainly have liquidity benefits, they also confirm a weakening of the fundamentals. When concerns about the U.S. economic fundamentals arise, expectations for rate cuts are often interpreted as bad news. Historical data shows that the positive correlation between U.S. Treasuries and U.S. stocks often corresponds to periods when Citigroup's U.S. Economic Surprise Index is negative. After a round of clearing out fundamentals and high interest rates, U.S. hedge funds will re-leverage, and the economic vitality of households and businesses will recover, making the rebound of U.S. stocks more certain.
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Author of this article: Song Xuetao from Guojin Macro, Source: Song Xuetao, Original title: &#34;Song Xuetao: Who Directed the Emotional Market of U.S. Stocks?&#34;
Risk Warning and Disclaimer
The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk

After experiencing the threat of a technical bear market, U.S. stocks have recently rebounded, with retail investor sentiment optimistic and institutional investors more pessimistic. The proportion of retail investors who are bullish has reached 33.2%, and trading in small-cap stocks is active, while institutional fund positions are at a low level. The optimism among retail investors mainly stems from expectations regarding fiscal deficits and tariff policies, although the actual effects are limited

- The U.S. stock market has seen a rebound despite initial fears of a technical bear market, driven by contrasting sentiments between retail investors and institutions.  
- Retail investors are optimistic due to factors like reduced spending and expectations of tax cuts, while institutional investors remain cautious, reflected in low net positions in futures.  
- The lack of quality alternatives to U.S. equities and the potential for a rebound in economic activity post-rate cuts contribute to the market's current dynamics, though the volatility of retail investments poses risks.

Song Xuetao: Who Directed the Emotional Market of US Stocks?