To The Moon

There are weeks when earnings are allowed to matter, and weeks when they are invited to speak only after geology, geography, and naval chokepoints have finished clearing their throats. Last week belonged to the second category. Corporate results did their part, especially in the AI complex, where demand for chips, foundry capacity, and the machinery that makes both possible still looks less like a cycle than a requisition order from the future. But the Gulf supplied the counterweight. Three additional US casualties, a closed Hormuz, and rising oil prices turned the macro backdrop into a toll road with a burning booth at the entrance. Investors may admire an earnings beat; they still have to pay for the crude.

That distinction matters because the ROOF Scores are no longer confirming the equity market’s preferred version of events. Aggregate sentiment is now negative at -0.22, down from neutral a month ago at +0.18, but little changed over the past week from -0.16. The monthly deterioration is the story; the weekly move is not. Investors did not capitulate last week. They simply failed to repair the damage already done. That is a less dramatic sentence than “sentiment collapsed”, but it is the more useful one. A weakening risk appetite that stops falling for a week has not become support. It has become an alibi.

The regional picture is doing the same thing, only less politely. Sentiment among Australian investors is bullish at +0.58 after a material weekly improvement, and UK investors remain bullish at +0.56, despite a modest deterioration over the past month. US investors are neutral at -0.03, still refusing to join either the optimists or the undertakers. But the broader developed-market complex is less forgiving: sentiment among DM investors is negative at -0.35 after weakening materially over the month, while DM ex-US investors are neutral at -0.10 only because classification thresholds are literal, not sentimental. Their monthly move of -0.80 is doing the talking. Europe has slipped negative, APAC ex-Japan sits at -0.48 just above the bearish threshold, EM investors are already bearish at -0.61, and sentiment among China investors is deeply bearish at -1.41 after another material weekly fall. The map is not split between good and bad. It is split between islands of risk tolerance and a mainland of reluctance.

This is why last week’s AI earnings were not enough. They were good news with a strong résumé and poor timing. In a positive sentiment environment, investors tend to overreact to good news and forgive defects in the footnotes. In a negative environment, good news must be precise, repeatable, margin-accretive, capex-light, geopolitically insulated. Bad news has no such administrative burden.

The oil shock is especially awkward for investors because it attacks the rally through more than one door. Higher crude prices threaten margins, inflation expectations, consumer income, central-bank patience, and the discount rate narrative that has helped equities look past almost everything else. AI can still be a powerful earnings story, but it cannot easily neutralize higher oil prices if investors are already less willing to take risk. The issue is not whether the AI investment cycle is real. The issue is whether investors with rising macro concerns will keep paying a scarcity multiple for future capacity while the present is repricing barrels. Even miracles have input costs.

The dispersion in ROOF Scores means that there is no single clean message. Australia and the UK say some investors are still willing to speculate. The US says investors are balanced, but not enthusiastic. Europe, developed markets, emerging markets, and China say reluctance has spread far enough that further upside now depends less on another corporate beat than on a reduction in the perceived downside. That is a different kind of rally fuel. Early recoveries can be led by risk-tolerant contrarians; durable advances require risk-averse investors to stop treating participation as a character flaw. Right now, too many of them are still waiting for the news to pass inspection.

This week, investors need an easing in the Gulf, steadier oil prices, and earnings that keep the AI narrative separate from macro risk. They may get some of that, but probably not all. With aggregate sentiment already negative and several markets bearish or close to it, the asymmetry is clear: positive news can steady the floor, but negative news will have investors running for the exit.

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

• US: PMI data and regional Fed surveys. Earnings from Alphabet, Intel, Tesla.

• Europe: ECB rate decision and Eurozone PMI data. UK inflation data.

• APAC: Japan CPI data.

• Global: Hormuz and now additional US casualties, are back in the driver’s seat.

[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 Score, 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 Score 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 unemotional. However, when both lines move outside this zone, the significant imbalance in the demand and supply for risk can lead to overreactions to unexpected news or risk events.