Big Wall Street Comeback Is Upending a Slew of Bear Market Bets

The financial markets’ dramatic rebound since early 2023 has left many bearish investors in its wake, upending bets that once seemed prudent in the face of inflation, geopolitical turmoil, and aggressive Federal Reserve rate hikes. What began as a brutal bear market in 2022—marked by the S&P 500’s 19.4% annual decline—has evolved into a recovery so swift that even the most pessimistic portfolios are scrambling to adapt.

The Bear Market’s Brutal Start (2022)

The initial stages of the bear market were shaped by three forces: Russia’s invasion of Ukraine, surging inflation, and the Fed’s rate-hike blitz. By mid-2022, the MSCI World Index had plummeted 14%, while the S&P 500’s tech-heavy sectors like communication services (-27%) and real estate (-25%) led declines.

Bearish strategies—such as shorting tech stocks or buying inverse ETFs—flourished. The ARKK Innovation ETF, which tracks high-growth tech and biotech names, lost 40% in 2022 alone, rewarding those who bet against it. Energy stocks, however, became a rare haven, rising 52% as crude oil spiked to $129/barrel.

The Turnaround: Cyclical Rebound and Fed Pivot (2023–2024)

The tide began to turn in late 2022 as inflation moderated and the Fed signaled a pause in rate hikes. By early 2023, the S&P 500 had clawed back nearly half its 2022 losses. The recovery was fueled by a sector rotation: cyclicals like energy and materials surged, while defensive sectors like utilities stagnated.

The tech sector’s revival was particularly striking. Despite lingering concerns about AI-driven job displacement and regulatory scrutiny, the Nasdaq Composite, which had fallen 33% in 2022, roared back with a 25% gain in 2023.

The 2025 Volatility: Tariffs, Sentiment, and the "Trump Put"

The current year has brought fresh challenges. President Trump’s global tariff proposals—threatening a 10% tax on all imports—sent the S&P 500 to within 18.4% of its February 2025 peak, testing investor resolve. Yet markets rebounded sharply after tariffs were scaled back, illustrating the "Trump put" effect: policy interventions often stabilize markets during selloffs.

Investor sentiment hit a 30-year low in April 2025, according to Bank of America’s fund manager survey. Historically, such extremes have been followed by average 12-month returns of 24%.

The Bearish Bets That Faltered

The comeback has upended several bearish strategies:
1. Shorting Tech: Investors who bet against FAANG stocks (now the "Magnificent 7" including AI leaders) faced losses as these names drove 2023–2024 gains.
2. Inverse ETFs: Funds like the ProShares Short S&P 500 (SH) saw massive outflows as the market rebounded.
3. Defensive Overweights: Portfolios heavy in utilities or consumer staples lagged as cyclical sectors took center stage.

The Data Behind the Turnaround

• Sector Performance: Energy’s 52% 2022 gain contrasted with tech’s -23% decline. By 2024, tech had recovered, while energy retreated as oil prices fell 40% from March 2022 highs.
• Sentiment and Returns: The S&P 500’s average one-year return after a 20% decline since 1950 is +19%, excluding crisis years.
• Policy Impact: The Fed’s terminal rate, initially projected at 5.1% in 2023, has been scaled back to 4.5% as inflation eases.

Conclusion: A New Reality for Bearish Strategies

The Wall Street comeback has reshaped the investment landscape, rewarding those who pivoted from defensive to cyclical bets and penalized stubborn bears. While risks remain—from tariff-driven stagflation to high valuations—the data underscores a clear pattern: markets tend to recover swiftly from sharp declines, and bearish strategies thrive only in prolonged downturns.

Investors should note two key lessons:
1. Avoid Overconcentration: The "Magnificent 7" tech giants now account for 35% of the S&P 500’s market cap, creating vulnerability to sector-specific risks.
2. Stay Dynamic: The recent rebound was fueled by Fed easing and geopolitical truces, but 2025’s volatility shows that policy shifts can reverse trends overnight.

As we look ahead, the S&P 500’s 2.3% 2025 GDP-linked gains and the Fed’s "data-dependent" stance suggest a cautious optimism. Yet history warns that even in a recovery, pockets of bearish opportunities may emerge—particularly in overvalued sectors or during fresh geopolitical shocks. For now, the message is clear: adapt or risk being upended by the comeback.