Investing.com -- The weakness seen in the S&P 500 during January 2025 is not unusual and mirrors similar patterns seen in 2024, 2022, and 2020, according to RBC Capital Markets.
Investor sentiment has also declined, with net bulls on the weekly AAII survey falling to 2.9% on the four-week average as of January 9, 2025, and to -2.7% on the weekly unadjusted data.
RBC strategists suggest that sentiment may continue to deteriorate, potentially reaching levels seen in the fall of 2023 when net bullishness bottomed out roughly one standard deviation below the long-term average.
"While painful for stocks in the short term, this improves the set-up longer term,” a team led by Lori Calvasina said in a Monday report.
Consumer sentiment, as tracked by the University of Michigan, has been recovering from the lows of 2022, but last week’s preliminary reading for January came in slightly below expectations.
Strategists believe this helps explain some of the stock market’s weakness, noting that the performance of the S&P 500 and Russell 2000 has closely followed trends in the Michigan consumer sentiment index since the onset of COVID.
They also observed that the S&P 500’s price action had outpaced the trends suggested by the sentiment index, signaling that the market may have been due for a short-term pullback.
Questions about the concentration of S&P 500 market capitalization in the largest names have also been raised early in 2025. RBC analyzed the top five and top ten companies by market cap, examining how their share of the S&P 500 in terms of market cap and net income has evolved over time.
While market cap concentration slightly exceeds net income concentration, both have been increasing. Strategists point out that this differs from the late 1990s leading up to the Tech Bubble when market cap concentration increased without a corresponding rise in net income concentration.
On the fund flows front, the investment bank notes that while inflows to US equity funds remain below last year’s highs and small-cap funds are still experiencing weak overall flows, inflows “appear to be in place for US large cap and US small cap funds with actively managed strategies."