MW Overly bearish investors risk writing off 2025 too soon. These strategies offer upside and downside protection.

By Barbara Kollmeyer

Ed Yardeni argues a Lehman-type meltdown is needed to match the gloom in markets right now

U.S. stocks are headed south following the long holiday weekend, as fresh trade tensions simmer around China and the dollar slumps on worries over Fed Chair Jerome Powell's job stability. It will also be a big week for earnings, so strap in.

There are so many bearish investors out there that it's bullish for the stock market. That's the gist of our call of the day from the president of Yardeni Research, Ed Yardeni, who urged investors not to write off 2025 quite yet.

It's not a stretch to understand why many investors are gloomy, with the S&P 500 SPX down 10% in 2025 on growing fears that President Donald Trump's tariff plan will spark a recession.

Read: Investors are eager for tariff deals. They might get more tumult in bonds and stocks instead.

And like many Wall Street forecasters and big banks, Yardeni himself has gotten more bearish on stocks, cutting his S&P 500 target twice this year, from 7,000 down to 6,000.

"It might require a stock market meltdown that matches or exceeds the 2008 Lehman Brothers crisis to justify the fever pitch of doom-and-gloom in world markets," he argued. "There are no clear signs one is afoot."

Yardeni flagged some reasons for optimism, such as recent reports that China was willing to negotiate with the U.S., albeit there is more negativity on that front for Monday. He said that step alone "could give Trump geopolitical cover to whittle his 145% tariff down to a market-relieving double-digit figure or suspend it."

But Yardeni also pointed to Polymarket.com, which said the chance of a recession has soared to 56% as of last week from 20% in early January. Yardeni said he sees a 45% chance of stagflation/recession.

And two closely tracked bull/bear ratios for stocks - Investors Intelligence and American Association of Individual Investors, or AAII - are hinting at a near collapse in bullish sentiment from late 2024 levels, he said.

He flagged one survey that showed 44.5% of consumers see falling stock prices in the next year, which seems "more like an electrocardiogram of an at-risk patient than efficient capital markets."

Yardeni pointed to another survey that shows just 31.8% of the under-40 crowd expect stock prices to rise in the next 12 months, versus 35% among those 40-60 crowd. The mean probability of that data: a 33.8% chance of stocks rising, he said.

While easy to shift toward despair these days, Yardeni said, "if our suspicions are right, and some hints of dawn reappear sooner rather than later, then writing off 2025 as an unmitigated disaster for stocks might be a costly mistake."

Adding to this, a team of Evercore ISI strategists led by Julian Emanuel also cautioned on what they see as a too-bearish view of stocks.

"With a 90-day window for trade negotiations, small caps are 'vulnerable' to upside at the slightest of possible headlines. Gold too has seemingly become 'the only asset around' as a destination for funds," Emanuel and his team said in a note. They added that options pricing assumes small caps are only headed down and it's blue sky for gold.

The Evercore team offers a way to play this, via options on the iShares Russell 2000 exchange-traded fund IWM. They suggested buying a call option on that ETF with a $204 strike price, giving an investor the right, but not the obligation, to buy at that price. They also suggested a put option at a 170 strike price, meaning an investor has the right, but not an obligation, to sell at that level.

In short, investors have the chance to profit if IWM rises, but still have downside protection if it falls further. Put options are bets on stocks falling, while call options are bets on those assets rising.

As for gold, they suggested two plays: shorting the SPDR Gold Shares GLD, an ETF that tracks gold prices, or an options strategy referred to as a collar. The latter involves buying a downside put and selling an upside call to protect against possible losses. Evercore's strategy is to sell a call option on GLD with a strike price of 323 and take out a put option with a strike price of 297.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) were dropping, and the yield on the 10-year Treasury note BX:TMUBMUSD10Y was rising. The dollar DXY was down more than 1%, while gold (GC00) was trading at a record above $3,400 per ounce and bitcoin (BTCUSD) also climbing.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              5282.7     0.28%   -6.71%  -10.18%  5.42% 
   Nasdaq Composite                                                     16,286.45  -0.62%  -7.94%  -15.66%  4.39% 
   10-year Treasury                                                     4.371      -12.30  11.30   -20.50   -25.50 
   Gold                                                                 3393.3     4.24%   12.06%  28.57%   40.99% 
   Oil                                                                  63.05      2.55%   -7.69%  -12.27%  -23.21% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

China has threatened to retaliate against countries reaching U.S. trade deals at its expense. Trump posted a list of "non-tariff cheating" on Truth Social.

Netflix Inc.'s stock $(NFLX)$ is up over 3% after the streaming provider reported booming profits.

Banking regulators approved $Capital One Financial Corp(COF-N)$.'s $(COF)$ $35.3 billion all-stock bid to buy Discover Financial Services $(DFS)$. Shares of both are up.

Leading economic indicators are due at 10 a.m.

Chicago Federal Reserve President Austan Goolsbee said U.S. economic activity may slump this summer.

Pope Francis, the first from the Americas, has died at 88.

Best of the web

Hegseth faces heat after new signal chat emerges and claim of Pentagon 'chaos.

We're getting priced out of our hobbies. Here's what's at stake.

This economist says there's a 90% chance of a recession - unless tariff policies are changed

The chart

Nancy Lazar, chief global economist at Piper Sandler, said she is worried about tariffs, particularly how they might hit the auto industry. Her chart showed just how much consumers spend on that sector. She said inflationary prices are hitting buyers and squeezing corporate profits. "Imports there have rolled over sharply, but still account for over 50% of those consumer purchases. And at the same time, auto & parts companies have not made any money in 7 years. How can that industry absorb the higher costs and likely weaker sales?"

Top tickers

These were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   AAPL    Apple 
   NFLX    Netflix 
   PLTR    Palantir Technologies 
   TSM     Taiwan Semiconductor Manufacturing 
   AMZN    Amazon.com 
   MSTR    MicroStrategy 
   AMD     Advanced Micro Devices 

Random reads

When an alligator comes knocking.

Robots raced humans in Beijing. They didn't exactly win.

-Barbara Kollmeyer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 21, 2025 07:08 ET (11:08 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.