Why Stocks Are Set to Melt Up Despite Investor Fear

Wall Street bulls continue to defy the odds as stocks climb the proverbial wall of worry. This week, the Nasdaq, S&P 500 Index, and Dow Jones Industrial Average each reached fresh all-time highs, while the small-cap Russell 2000 Index hovers just below them. Meanwhile, despite the ‘Liberation Day’ panic of early 2025, the tech-heavy Nasdaq 100 Index is enjoying a banner year, gaining some 23% thus far. Despite the robust performance, stocks are likely to melt up and even gain momentum into year-end for five reasons, including:

1.      Muted Investor Sentiment: Many investors may be surprised to learn that despite the robust performance and all-time highs for equities, the average investor remains fearful. For instance, the latest data from the CNN Fear/Greed Index registered a “Fear” reading. In other words, despite the strong market returns, investors are far from euphoric and may even be considered skeptical at this juncture – a bullish contrarian signal.

2.      Bullish Q4 Seasonality Looms: Since 1950, Q4 has been the best-performing quarter for US equities. Typically, stocks experience some weakness in Q3, but bottom on average on October 27^th. Additionally, institutional investors will likely be forced to ‘window dress’ their portfolios and chase performance into year-end.

3.      Earnings Season is Off to a Robust Start: According to market research from BBG, 70% of S&P 500 reporters have exceeded sales estimates, the highest proportion of positive surprises in about four years. 85% of benchmark companies have beat on earnings, just 14% have missed. Investors should get more good news when companies like Advanced Micro Devices (AMD), CoreWeave (CRWV), Arm Holdings (ARM), Meta Platforms (META), and Apple (AAPL) report in the coming days.

4.      Trade Tensions are Easing: One of the most significant market headwinds has been investor concern about trade tensions between the world’s two largest economies – China and the US. However, Trump administration trade officials recently provided some welcome news, stating that US-China trade talks are moving into the final stages. US President Donald Trump and Chinese President Xi Jinping are scheduled to meet on October 30^th in South Korea in another sign of easing trade tensions between the two economic rivals.

5.      The Return of a Dovish Federal Reserve: Fed Chair Jerome Powell recently cut rates for the first time after a lengthy pause. Historically, S&P 500 returns are stunning after such pauses.

Bottom Line

Despite investor fears, US stocks are primed to melt up into the historically strong fourth quarter. Easing trade fears, a Dovish Fed, and robust earnings are bullish tailwinds for stocks into year-end.

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This article originally published on Zacks Investment Research (zacks.com).

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