Does Extreme Optimism, January Gains Spell SPX Trouble?

The S&P 500 Index (SPX) gained 1.4% in January -- a historically a good sign for the months ahead. According to the January Barometer -- a well-known seasonal indicator -- a positive first month typically leads to strong returns for the remainder of the year. Data going back to 1950 shows the markets has significantly outperformed through the year's end when January ends on a high note.

Below, we will break down numbers for the remainder of the year based on our current environment and assess which stocks have shown the strongest January performance by separating them into those expected to go higher, and those expected to go lower based on their own January Barometer.

How January Sets Off Annual Performance

The January Barometer, although a simple concept, has been a reliable indicator. Since 1950, when the SPX was positive for the month of January, the index averaged a return of 12.24% for the rest of the year, with 87% of the returns positive. When January was lower, however, it returned just over 2% on average, with 60% of returns positive.

This next table displays positive January months and breaks them down to reflect our current environment to see if anything changes. There have been 15 times since 1950 when the SPX finished January within 1% of its all-time high. In those years, the index returned 12.4% on average and was positive 87% of the time -- not that different from the table above after positive January months.

Another key metric was newsletter sentiment from the Investors Intelligence (II) poll, which determines the percentage of investors that are bullish, bearish, or expecting a correction.

When the difference between bullish and bearish newsletters reaches 40%, we call that extreme optimism. There have been six times in which the average bulls minus bears in January was above 40%, which is the case this year. In those prior years, the SPX did poorly for the rest of the year, averaging a slight loss, but it was positive three of six times. Even with just three data points, the extreme optimism could be a cause for concern.

There have been three other years, not including the current year, when those three criteria were all met (positive January, near an all-time high, and extreme optimism from the II poll). Those years are listed below, with the last time being in 2017, when the SPX went on to return 17% for the balance of the year.

The time before that was in 1987. That year, the market did fine right up until Black Monday on Oct. 19, when the index fell over 20% in a single day. The SPX was down about 10% from February through December of that year. The third time was in 1965, with the SPX gaining 5.6% through the year's end.

Individual Stocks with a January Barometer

When taking a closer look at SPX stocks over the past 10 years, it's evident that some stocks exhibit their own January Barometer. That is, if January was positive, so was the rest of the year, and vice versa. The two tables below show stocks with January returns that correctly predicted the rest of the year at least 80% of the time.

This first table shows stocks with a reliable January Barometer that were also positive in the fist month of 2026. Digital Realty Trust (DLR) and D.R. Horton (DHI) are two of just three stocks that had accurate January Barometers 100% of the time for the past 10 years. 

This final table displays stocks likely to go down according to their own January Barometer. The first, Fair Isaac (FICO), is the third stock in the SPX with a January Barometer that has been 100% accurate over the past 10 years. FICO,  which is well above $1,000, was down 13.5% in January. Over the past decade, the equity had two other negative Januarys, and remained down for the rest of the year both times, averaging a return of -6.7%. 

Microsoft (MSFT), which is at the bottom of the table, was also lower this January. Although it’s January Barometer was accurate overall, in the three other years MSFT was down in January, it moved higher for the remaining months. Nasdaq (NDAQ) is the same way. So, maybe the poor January isn’t such a bad sign for these companies.