This Sentiment Gauge Flips to Risk-on as Hopes That Tariff Fear Has Peaked

The stock market’s sharp rebound after its April slump has dramatically shifted one key measure of investor sentiment.

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A risk-on/risk-off gauge developed by the analytics group Duality Research had been showing that investors were mostly risk-averse through much of April. But as May began, the mood noticeably shifted toward a more aggressive, risk-taking approach.

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In a conversation with MarketWatch, Duality explained that this particular gauge draws on several input variables, the most important of which examines how defensive stocks are performing relative to the broader market. Defensive stocks are generally those seen as safer, such as utilities, healthcare, and consumer staples, which tend to hold up well even in economic downturns.

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“Ultimately, we’re trying to develop a broader view of how defensive names are behaving compared to the wider market,” Duality told MarketWatch. A drop in the relative demand for defensive stocks often signals that investors are more willing to place bolder bets on riskier assets.

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Looking at recent market activity, Duality pointed out that the S&P 500’s (SPX) strong price movements over the past week have pushed their risk-on/risk-off indicator back into bullish territory after spending more than a month in bearish, risk-off mode.

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This turnaround is “another data point going into the bulls’ bucket in our weight-of-the-evidence approach,” Duality said. They emphasized that trend improvements like this can often serve as the foundation for a lasting market rally.

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In a Substack post earlier this week, Duality highlighted that the sharpness of the stock market’s rebound appears to be fueled by investors’ belief that the worst of the tariff concerns had passed by mid-April — even though there are still widespread worries about an economic slowdown.

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“What really moves markets is the rate of change — so even if the current conditions aren’t perfect, just seeing improvement can keep the positive momentum going,” the firm wrote. They added that as long as the administration continues rolling back tariffs, the surrounding macroeconomic noise might not matter as much to the markets.

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The strength of the market was underscored just a week ago when the S&P 500 managed to recover from an intraday drop of 2.3%, a move that Duality described as a rare and powerful bullish signal.

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“In fact, the last time the market pulled off a recovery like that was back on October 13, 2022 — the exact day the market bottomed out during the 2022 bear market,” they noted.

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However, despite these positive signs, Duality also offered several points of caution. For example, they observed that defensive, or staples, stocks are still in a relative uptrend compared to the S&P 500. This is somewhat surprising because, typically, one would expect defensive stocks to lag behind the broader market after such a sharp reversal upward.

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Additionally, they pointed to investment-grade (IG) credit spreads — the extra interest rate that safer companies pay over Treasury yields when they borrow. Ideally, when market conditions improve and risk appetite rises, these spreads should narrow. But right now, despite stocks pushing higher, IG spreads have stopped narrowing and remain stuck above 100 basis points.

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“We usually say that nothing really bad happens when IG spreads are below 100,” Duality said. “So it’d be nice to see them drop below that threshold soon.”

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Taken together, Duality’s analysis suggests that while the recent rally has revived optimism and risk-taking in the stock market, there are still mixed signals that investors should watch carefully. The pullback in defensive stock demand and the powerful bounce in the S&P 500 are encouraging signs for the bulls, indicating that sentiment is improving and momentum is building.

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Yet, the persistence of defensive stocks’ strength and the stubbornness of investment-grade spreads show that not all corners of the market are flashing green lights. These areas of caution serve as reminders that the recovery may not yet be fully confirmed and that investors should stay alert to any signs of reversal or stress.

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Overall, Duality’s weight-of-the-evidence approach paints a picture of a market that has shifted from cautious to optimistic in recent weeks — but one that still carries some underlying tensions. As the rally continues, it will be important to monitor whether credit conditions improve further and whether defensive sectors start to give way to more cyclical, growth-driven parts of the market.

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For now, the bulls appear to have the upper hand, buoyed by trend improvements and the belief that the worst tariff fears have passed. Whether that optimism translates into a sustained rally will depend on whether these early signs of recovery continue to spread across the broader financial landscape.

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