The Reversal of Major Index Futures: A Sign of Market Sentiment Shift?

The 2024-2025 market cycle has underscored a dramatic reversal in momentum-driven strategies, with major index futures like the S&P 500, Nasdaq 100, and Dow Jones reflecting a broader shift in investor sentiment. This reversal, rooted in historical patterns and macroeconomic triggers, raises critical questions about the sustainability of momentum investing and the role of sentiment in shaping market trajectories.

The 2024 Momentum Surge and Its Limits

2024 witnessed one of the most robust momentum runs in three decades, with high-momentum stocks outperforming low-momentum counterparts by +28% year-on-year, according to Morgan Stanley. This surge was fueled by a low-volatility environment, AI-driven tech sector gains, and aggressive rate cuts by the Federal Reserve, which collectively amplified risk-taking. The S&P 500 and Nasdaq 100, particularly, benefited from concentrated returns in high-growth names, with the Nasdaq's performance heavily skewed toward the "Magnificent 7" mega-cap tech stocks, per LPL Research.

However, this momentum was built on elevated valuations. By late 2024, momentum stocks traded at price-to-earnings (P/E) ratios 33% above historical averages, as LPL Research noted, creating a fragile foundation. Historical precedents suggest that such extreme outperformance often leads to near-full reversals in subsequent years. For instance, in seven of 11 years where momentum was the top-performing factor, it underperformed the following year, a pattern LPL Research documented. This pattern has materialized in 2025, as investors recalibrate to shifting macroeconomic realities.

The 2025 Reversal: Sentiment Shifts and Geopolitical Catalysts

The first quarter of 2025 marked a sharp correction in momentum strategies, driven by a confluence of factors. Heightened geopolitical risks, including President Trump's aggressive tariff policies and U.S.-China trade tensions, triggered a risk-off sentiment, according to a Quoniam article. By February 2025, the S&P 500 had fallen 10% from its peak, marking its worst quarterly performance since Q3 2022, the AAII survey reported. The Nasdaq 100, heavily weighted toward growth stocks, faced similar retracements as investors rotated into value and defensive sectors, a development noted in the Morgan Stanley piece.

This reversal was not merely cyclical but structural. Defensive strategies, particularly low-volatility and value investing, surged in popularity. Low-volatility strategies, which had underperformed by -3% in early 2025, turned a 27% outperformance within four weeks, Quoniam reported. This shift reflects a broader breakdown in the momentum/growth paradigm that dominated 2024 and signals a return to more risk-averse positioning.

Investor Sentiment Indicators: Bearishness and Volatility

Investor sentiment metrics further validate this reversal. The AAII survey reported 43.4% bearish sentiment in September 2025, a stark contrast to the bullish optimism of 2024. The CBOE SPX put/call ratio, a key gauge of market fear, stood at 1.27 as of September 9, 2025, indicating a bearish tilt, a figure highlighted in the Morgan Stanley analysis. While this ratio has moderated from its 2024 peak of 1.43, it remains above 1.0, signaling caution.

The VIX, or "fear gauge," also provides insight. In 2024, the VIX averaged 15.5, far below its historical average of 19.5, reflecting complacency, as LPL Research observed. However, as momentum strategies faltered in 2025, the VIX began to rise, aligning with the S&P 500's volatility. The inverse correlation between the VIX and the S&P 500 (historically -0.70) became more pronounced during this period, according to a Macroption analysis, underscoring the interplay between sentiment and index performance.

Implications for Momentum and Sentiment-Driven Investing

The 2025 reversal highlights the importance of adapting to shifting market dynamics. Momentum strategies, while historically rewarding, are inherently cyclical. The 2024 surge, amplified by concentrated returns and elevated valuations, created a high-risk environment. As of Q1 2025, the Nasdaq 100's technical indicators suggested a wave 2 correction, with stabilization expected as support levels are tested, a point raised by Morgan Stanley.

Meanwhile, the Dow Jones, with its industrial and blue-chip composition, showed resilience, supported by infrastructure investments and corporate realignments, as Morgan Stanley noted. For investors, the lesson is clear: diversification and adaptability are paramount. While momentum strategies may regain traction in Q4 2025 (historically a strong period for momentum returns, per the Macroption piece), the current environment favors a balanced approach. Defensive sectors, value stocks, and low-volatility strategies are likely to remain in favor until macroeconomic uncertainties-such as inflation persistence and geopolitical tensions-abate, Quoniam argued.

Conclusion

The reversal of major index futures in 2025 is a textbook example of market sentiment shifts. Driven by geopolitical risks, valuation corrections, and macroeconomic recalibrations, this reversal underscores the cyclical nature of momentum investing. While the future remains uncertain, the interplay between sentiment indicators and index performance provides a roadmap for navigating the evolving landscape. Investors who recognize these dynamics-and adjust their strategies accordingly-will be better positioned to capitalize on the opportunities ahead.