Stock Market Sentiment Reaches 'Euphoria' Levels, Warns of Potential Downturn

Stock market sentiment is rising to "euphoria" levels, with stocks hitting record highs daily, bitcoin surging, and meme stocks gaining popularity. Citi's Levkovich Index, which tracks market sentiment, has reached 0.65, above the threshold signaling "euphoria" and historically preceding weaker returns. Elevated sentiment can leave markets vulnerable to disappointment, and potential triggers for a reversal include a global slowdown, trade tensions, or an AI letdown.

Stock market sentiment has surged to "euphoria" levels, with stocks hitting record highs daily, bitcoin surging, and meme stocks gaining popularity. Citi's Levkovich Index, which tracks market sentiment, has reached 0.65, above the threshold signaling "euphoria" and historically preceding weaker returns. Elevated sentiment can leave markets vulnerable to disappointment, and potential triggers for a reversal include a global slowdown, trade tensions, or an AI letdown.

In the volatile landscape of 2025, the interplay between geopolitical optimism and corporate earnings performance has become a critical lens for investors navigating key tech and services sectors [1]. The U.S.-EU trade negotiations, centered on former President Donald Trump's 30% tariff threat, have created a dual narrative: one of risk and another of opportunity. The EU's proposed 15% baseline tariff, lower than Trump's 30% threat but higher than the initial 10%, has injected a mix of caution and hope into markets. European Commission President Ursula von der Leyen's upcoming meeting with Trump in Scotland (July 27) has become a focal point for investors, with the August 1 deadline looming. If a deal materializes, it could alleviate trade tensions, potentially lifting the S&P 500's tech-heavy constituents.

Despite the trade uncertainty, tech and services sectors have shown remarkable resilience. Over 80% of S&P 500 companies exceeded earnings estimates in Q2 2025, with megacap tech firms like Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) driving much of the momentum. For instance, Microsoft's Azure cloud division reported a 22% year-over-year revenue increase, while Apple's services segment benefited from renewed global demand. The services sector, though more fragmented, has also thrived. The U.S. services surplus in May 2025 hit $26 billion, buoyed by strong digital services and financial exports.

The convergence of trade optimism and strong earnings has created a unique investment environment. For tech stocks, the potential resolution of U.S.-EU tariffs could unlock further growth. A deal would reduce supply chain risks and stabilize pricing for components like semiconductors, which are critical to companies such as Intel (INTC) and AMD (AMD). Services firms, particularly those with cross-border exposure, also stand to benefit. Firms like Mastercard (MA) and PayPal (PYPL), which rely on seamless international transactions, could see reduced friction if trade tensions ease. Conversely, companies in sectors like pharmaceuticals (e.g., Pfizer, Roche) face elevated risks due to Trump's hinted tariffs on these goods, which could disrupt global supply chains.

While the current trajectory is optimistic, investors must remain vigilant. A no-deal scenario could trigger a 30% tariff escalation, likely causing a VIX spike and sector-specific sell-offs. Tech stocks with high exposure to EU markets—such as SAP (Germany) and ASML (Netherlands)—could face disproportionate headwinds. To mitigate these risks, a diversified portfolio approach is advisable. Defensive sectors like utilities and healthcare, which are less sensitive to trade policy, could provide balance. Additionally, investors might consider short-term options strategies (e.g., iron condors) to hedge against volatility.

The S&P 500 (^GSPC) notched five record highs in as many trading days last week, capping off what's now a 28% rally since reaching this year's lows on April 8 [2]. This V-shaped recovery in the benchmark index marks the second-fastest rebound from a drawdown of at least 19% in the last 75 years. Data from Morgan Stanley's chief investment officer Mike Wilson shows that earnings revisions breadth has rebounded as dramatically as, and in lockstep with, the S&P 500 itself. With 34% of the S&P 500 having reported results, earnings in the second quarter are on pace to grow 6.4%, up from the 5% expected on June 27, per FactSet data. Estimates for year-over-year earnings growth in the final two quarters of 2025 and for the full year 2026 have been moving higher.

The Commodity Futures Trading Commission's (CFTC) latest Commitments of Traders (COT) report for July 2025 has revealed a dramatic bearish shift in speculative positioning for the S&P 500. The net speculative position has plunged to -86,800, well below the typical neutral range of -50,000 to +100,000. This reading is among the most bearish in recent memory and signals a growing wariness among both institutional and retail traders about the near-term prospects for the equity market [3]. The current bearish positioning in the S&P 500 is being driven by several key factors: Federal Reserve Policy Uncertainty, Softening Economic Data, and Sector Rotation Dynamics.

The U.S.-EU trade negotiations exemplify the delicate balance between geopolitical optimism and corporate fundamentals. For tech and services sectors, the path forward hinges on three factors: the resolution of tariffs, the EU's ability to adapt to U.S. innovation dynamics, and the Federal Reserve's response to inflation amid trade uncertainty. Investors who adopt a dual focus—monitoring both trade developments and earnings momentum—will be best positioned to capitalize on near-term opportunities. As the July 27 meeting approaches, the coming weeks will likely determine whether the current market optimism translates into sustained growth or fades into another cycle of geopolitical-driven volatility.

References:
[1] https://www.ainvest.com/news/impact-trump-eu-trade-deal-speculation-tech-stocks-market-sentiment-2507/
[2] https://www.aol.com/finance/v-shaped-recovery-stocks-v-100013104.html
[3] https://www.ainvest.com/news/market-sentiment-shifts-cftc-data-reveals-bearish-outlook-500-means-investors-2507/