To The Moon

Investor sentiment started the year at neutral levels in seven of the ten markets we track. In Asia ex‑Japan and Global Emerging Markets, sentiment moved into bullish territory, driven primarily by declining risk aversion rather than increased risk appetite. By contrast, recent China–Japan tensions have weighed on sentiment in Japan, where investors have turned negative.

Importantly, the broad improvement in sentiment across markets reflects lower volatility rather than any materially positive news. Reduced estimates of potential losses have simply made investors less risk‑averse than they were in November and December. Looking ahead, the start of the Q4 earnings season should lead to greater dispersion, as investor attention shifts from macro and market‑wide drivers to company‑specific news.

The calendar is crowded with potentially market‑moving developments, from Supreme Court rulings on tariffs and the nomination of the next Fed chair to unrest in Venezuela, peace talks between Russia and Ukraine, protests in Iran, and renewed debate over Greenland. For now, however, lower volatility is letting investors look past these risks, assuming for now that in geopolitics - as in markets - you are not who you want. You are who wants you back.

Japanese investor sentiment turned sharply negative last week as tensions between China and Japan escalated, following Beijing’s imposition of new export controls on rare‑earth magnets to Japan. Expect sentiment to remain hostage to these developments and to continue to decline as low as it can possibly go until tensions have got about as bad as they can reasonably get.

With a heavy slate of binary geopolitical, political, social, and macroeconomic risks still ahead, the Q4 earnings season will act as a rare island of predictability amid the broader ocean of uncertainty surrounding the Trump 2.0 administration’s domestic and foreign policy agendas.

Barring any adverse developments on the geopolitical, political, social, or macroeconomic agenda, markets should become somewhat Newtonian over the next four weeks. During earnings season, when company‑specific results reclaim the front page, markets tend to turn deterministic‑ish—or at least try to.

This week effectively kicks off the annual rebalancing exercise, as investors hunt for undervalued names and shed overvalued ones - something like recycling, but for portfolios. That process, however, remains vulnerable to sudden shocks: geopolitics can still flip sentiment from neutral to bearish at any time, as Japan reminded us last week. Emotions, after all, are the force Newton left out, all the way back to the apple in the garden.

Last year, the AI theme acted as a rising tide, lifting both AI infrastructure and AI software companies. While the former has already converted large capital outlays into sizable profits, the latter has yet to demonstrate meaningful revenues tied to that hoped‑for wave of end‑user demand.

Among AI software companies, valuations are stretched, to put it mildly. Bulls argue that traditional valuation metrics don’t matter, it’s like arguing who got there first with the calculus - the English say Newton, the Germans say Leibnitz - but it doesn’t matter. For now, a part of every investor - perhaps the hopeful part or maybe the courageous part – still wants to believe in AI’s transformational potential.

With that in mind, we would reiterate last week’s Four‑As framework and recommend staying within close reach of the ‘safe’ portfolios during your recycling exercise.

Potential triggers for sentiment-driven market moves this week[1]

• US: CPI, PPI, and retail sales data. Q4 earnings from major banks and Delta Airlines.

• Europe: GDP updates for Germany and the UK. Eurozone industrial production and trade balance data.

• APAC: China trade data. Japan PPI and Tankan Survey results.

• Global: China-Japan tensions. US-Columbia tensions, US-Greenland/Denmark, Iran.

[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the ten markets we follow:

How to Interpret These Charts:

Top Charts:

The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).

• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).

• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:

The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.

• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:

The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.