Comparing the Current Market Backdrop to September 2022: A Study in Bearish Sentiment vs. Market Reaction

The latest AAII sentiment survey shows an extreme level of bearish sentiment at 60.62 percent, marking its highest reading since September 15 and 22, 2022. Historically, such high levels of pessimism have coincided with major market turning points, making this an interesting contrarian indicator. However, what stands out in the current environment is that despite elevated bearish sentiment, we have not seen a significant selloff in equities. This is in stark contrast to September 2022, when markets dropped sharply amid economic turmoil and aggressive Federal Reserve tightening.

Bearish Sentiment Today vs. September 2022

The last time bearish sentiment was this high, the S&P 500 was in free fall, hitting a bear market low of 3,502 in October 2022 before beginning the bull run that persists today. Back then, investor fears were met with actual follow-through selling, unlike today, where markets have remained choppy but resilient near all-time highs. This divergence suggests that while investors claim to be bearish, they are not translating this sentiment into aggressive selling, keeping markets from rolling over.

Key similarities and differences between February 2025 and September 2022 highlight why this bearish sentiment may not lead to an imminent crash but rather a potential breakout.

Macroeconomic and Market Conditions Then vs. Now

September 2022: Bearish Sentiment Backed by Real Market Fear

Federal Reserve policy and inflation played a significant role in driving market sentiment in 2022. The Fed had just hiked rates by 75 basis points for the third consecutive time, with clear signals that more hikes were coming. The terminal rate was projected at 4.6 percent for 2023, sending shockwaves through equity and bond markets. The August 2022 CPI report showed inflation at 8.3 percent, higher than expected, fueling concerns of an entrenched inflationary cycle.

The market reaction was severe. The S&P 500 dropped nearly 10 percent in September, closing at its bear market lows. Treasury yields surged, with the 10-year yield climbing toward 4 percent, leading to tighter financial conditions. The U.S. dollar index spiked, adding pressure on corporate earnings and global liquidity. The housing market slumped, recession fears intensified, and global macro concerns compounded the risk-off sentiment.

Global factors amplified volatility. UK bond market turmoil led to an emergency intervention by the Bank of England to stabilize markets. China was still locked into strict COVID policies, dragging on global supply chains. Europe faced an energy crisis exacerbated by the war in Ukraine, increasing the risk of a severe recession.

The result was a market-wide decline as investors aggressively sold equities, reinforcing the pessimistic sentiment.

February 2025: Bearish Sentiment Without the Selling Pressure

Unlike 2022, the Fed is no longer aggressively tightening. Instead, rate cuts are now on the table for 2025, even if the exact timeline remains uncertain. Inflation has moderated significantly, with core CPI around 3 percent, down from the 8.3 percent levels of 2022. Treasury yields remain elevated but have stabilized rather than spiking uncontrollably.

Despite four consecutive weeks of deeply negative bull-bear sentiment, equity markets have not meaningfully declined. While choppy trading has reflected caution, major indices remain near all-time highs, unlike the sharp declines of September 2022. The S&P 500 has not rolled over, and support levels have held, keeping bears from gaining control.

Global factors remain a concern, but they are less disruptive than in 2022. Tariffs are a major issue, but they are largely self-imposed and reversible. This differs from 2022’s structural inflation, supply chain breakdowns, and global energy shocks. Geopolitical risks remain, but the market has shown resilience in absorbing them without panic selling.

The result is that markets remain stable despite extreme bearish sentiment, suggesting a potential contrarian buying opportunity rather than a looming crash.

Bearish Sentiment as a Contrarian Indicator

In both September 2022 and February 2025, bearish sentiment exceeded 60 percent, a level historically associated with market bottoms rather than breakdowns.

However, the difference is in market behavior. In 2022, investors were selling aggressively, leading to lower stock prices. In 2025, sentiment is negative, but investors are not selling in droves—suggesting that while fear exists, there is no clear catalyst driving mass liquidation.

This mismatch between sentiment and price action suggests that markets could be setting up for a breakout rather than a breakdown, provided that support levels hold.

What to Watch Next

One key factor is whether markets can hold key support levels. If the S&P 500 stays above major support levels, it would confirm that investors are not acting on their bearish views. Historically, when the bull-bear spread is this negative, it has often marked key inflection points for a rebound.

Another factor is whether investors move from caution to selling. If bearish sentiment translates into actual selling pressure, then a deeper correction could follow. However, the lack of aggressive selling so far suggests a more defensive stance rather than true market fear.

Federal Reserve policy and tariff risks will also play a role in shaping market direction. If tariffs are one of the biggest concerns, they are a policy-driven risk that can be reversed. Fed guidance will be crucial—if rate cut expectations remain intact, markets could shake off bearish sentiment and rally.

Final Thoughts

The current high bearish sentiment is reminiscent of September 2022, but the underlying economic backdrop is far different. In 2022, the Fed was aggressively hiking, inflation was out of control, and global crises fueled risk-off sentiment—causing a major selloff. In 2025, rate cuts are expected, inflation is lower, and while there are concerns about tariffs and valuation, there is no comparable fundamental shock.

The failure of markets to break down despite extreme bearish sentiment suggests that a significant shift could be brewing. If support holds, this could mark a key contrarian buying opportunity rather than the start of a new downtrend.

Bears may have sentiment on their side, but the lack of follow-through selling suggests they should remain defensive rather than aggressive.