Fear is back in control of the U.S. markets…

The majority of President Donald Trump’s 25% tariffs went into effect for Mexico and Canada earlier this month. Some were postponed until April. But investors now realize that the idea of imposing tariffs is more than just rhetoric.

The S&P 500 Index dropped 10% from its recent high, triggering an official correction (though it has inched higher in recent days). And the tech-heavy Nasdaq 100 Index fell as much as 13%.

Of course, everyone’s wondering what kind of economic damage we’ll see… and what it will mean for stocks in the longer term. And that surge of fear has pushed bearishness to one of its highest levels in history.

It’s not all bad news, though… because this rare setup might be one of the most promising signals out there for future stock returns.

It points to 40% upside potential over the next year. And that means you should be buying the dip right now.

Let me explain…

You can’t afford to ignore investor sentiment. Markets are made up of people… And people are often irrational.

As a whole, the market does act rationally most of the time. But in times of extreme fear or greed, that rationality breaks down. Sentiment gets stretched… And that’s when it can give you crucial insight into what you should do with your money next.

To put it simply: At extremes, investor sentiment really matters. And that’s the exact situation we have right now.

We can see it by looking at the American Association of Individual Investors (“AAII”) survey – which tells us a lot about how “mom and pop” investors feel about the markets.

Since 1987, the AAII survey has asked individual investors – not professionals – whether they’re bullish, bearish, or neutral on stocks over the next six months. And when a lot of folks are answering the same way, the survey is a powerful contrarian indicator.

Recently, the number of bearish responses spiked. More than 60% of respondents were bearish on stocks in late February. Take a look…

The recent bearish reading of 60.6% is one of the highest on record. It’s nearly as bad as the bottom of the 2022 bear market… And before that, we’ve only seen two higher readings since 2000 (both during the global financial crisis).

What we really want to know, though, is what this means going forward. So I tested each instance of AAII bearishness topping 60% to see what U.S. stocks did next. These setups have only happened six other times since 1987. And the results were phenomenal…

Now, I run a lot of numbers on the markets. Sometimes, an individual stock or volatile sector might see outperformance this strong – but for the overall market, it’s nearly unheard of.

Similar setups led the S&P 500 to 8.3% gains in three months, 16.2% gains in six months, and staggering 40.2% gains over a year. Not only does that crush the typical performance… but even the returns on their own are hard to believe.

What’s more, stocks never lost money in the year after these sentiment blowouts. And the smallest return was a massive 28%.

Nothing is a sure thing in the investing world… But this setup is about as close as you can get.

Of course, you want to be disciplined. Have stop losses in place… and follow them. But according to history, this is a fantastic time to buy the dip. Stocks are set up to absolutely soar over the next year.

Good investing,

Brett Eversole

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Source: Daily Wealth