Ketu Desai
By Ketu Desai
The wall of worry has risen to the point investors should question how much of this worry is already priced in. Sentiment and positioning have become quite significant lately. CNN features a fear and greed index and that is currently in “extreme fear”. We’ve been in “fear” or “extreme fear” for the majority of time since October 2025.
Fund managers raised cash at the quickest pace since the pandemic. Active investment managers have the lowest exposure since the tariff bear market. The AAII (American Association of Individual Investors) has more bears than bulls according to their Investor Sentiments Survey. Hedge funds have net sold equities for six straight weeks and the third most in the last decade.
The volume of short ETFs is at its largest ever, yet the demand for right tail protection is minimal. Since early February, the VIX (volatility index) spent most of its time above 20, peaking at 35. The VIX curve then inverted for most of March. The market has reduced over the last six months with most sectors correcting or in a bear market. This market is well hedged, sentiment tanked, and positioning is a lot lighter.
Oil is at the forefront of economic concerns. The market-implied pricing of a ceasefire only moves above 50% in May. The forward curve expects prices to be above $80 by October. Investors have the largest net long position in Brent crude in years. Oil prices haven’t been able to take out the initial near $120 spike, and momentum has been making lower highs. Investors are 34% overweight commodities, the most since the last cycle peak in April 2022. Policymakers are panicking, which is a good sign for investors. The market has priced in a lot of bad news and will incrementally worsen, causing further hikes.
We’ve had a rolling out of corrections industry by industry. Nearly half of the S&P500 is in bear market. The average stock is already down by 20%. The Nasdaq has been down in 9 of the last 10 weeks. In the past, Nasdaq was up 100% of time within one year with an average gain of 32.5%. The correction began in late summer 2025 with Software and Bitcoin the first to correct but are now down more than 50%. The correction moved along to other sectors such as consumer discretionary. These stocks have hit wash-out levels, where north of 50% of the sector is in bear market.
Financials have traded poorly for months with premiere names such as American Express, Visa, Goldman Sachs, JP Morgan all in bear market. In recent weeks, the rolling correction has taken out large-cap tech, real estate, transports, healthcare, staples, and materials. Later in the month it tapped into gold, silver, memory, and AI buildout industrials. The last group standing is energy. Not only have most groups corrected, but the market has also repriced Fed expectations.
We came into 2026 pricing in 2 cuts, now priced such that the Fed is more likely to hike. A new chair is coming in a few months, and it is highly likely he will want to cut. The market has priced quite a lot, and any incremental good news creates an upside.
Private credit is another major headwind. The industry witnessed rapid growth from $250bn in 2008 to nearly $2 trillion. It pushed into new distribution channels such as retail and private wealth. With such growth, the competition for deals was fierce and led to a situation where underwriting standards were relaxed with reduced protections, limited covenants, and more PIK deals. In recent months, cracks have formed; first with potentially fraud cases such as First Brands.
Recently, there were concerns about over-exposure to software, an industry that could be disrupted by AI. This has caused a flood of redemptions from private credit funds, leading to gates being put up. Lenders will likely work with borrowers to amend and extend loans, PIK, or equity deals. They will utilize CLO (Collateralized Loan Obligation) structures to offload certain deals. It is not a great situation for private credit or equity as it is unlikely that we will get a sudden spike in defaults, causing an economic collapse.
Goldman expects private credit headwinds to result in a 0.1% drag on GDP. Deals will work slowly in the background for a long period of time. The market will continue to re-price the equity of many names. The terminal value has been significantly diminished with fundraising will slow and exits minimal. Public markets have outperformed private across all time frames, with better liquidity, transparency, and access to the biggest and best companies in the world leading the most important themes such as AI. This private market capital will eventually flow into public markets instead.
While there are short-term deviations, stocks ultimately follow earnings. The decline this year has been all multiple contractions. The multiple is down 15%, while earnings expectations remain strong at +16.3%. Despite all the headwinds, S&P earnings estimates have increased for Q1, full-year 2026 and 2027. One of the areas that has been hit hard yet remains attractive is financials. They entered the year as a loved group, and now positioning is completely washed out in the second percentile.
These financials are expected to have double digit earnings growth this year and next, trading at just 0.96x PEG ratio, meaning that they are growing faster than their multiple. They trade at just 12.5x cash flow, compared to 18x for S&P, a 44% discount. They received a positive tailwind in March with the announcement that they are able to hold a lower amount of capital. Large banks will be able to hold on average 2.4% less capital. If the rate environment improves and the yield curve steepens that is a further tailwind. Loan growth should also improve as private credit is hampered.
Financials will also benefit from large IPOs such as SpaceX, Anthropic, and OpenAI. The M&A environment has only one way to go. Morgan Stanley’s co-head of the Financial Institutions Group sees the possibility of $100 billion in bank consolidation within the next few years. Margins have expanded to 20%, trailing only tech within S&P. These will continue to expand, as technology and AI get integrated. Goldman’s CEO said, “The initial registration prospectus for an IPO – might have taken a six-person team two weeks to complete, but it can now be 95% done by AI in minutes.” Virtual assistants like Wells Fargo’s “Fargo” and Bank of America’s “Erica” automate 80%+ of customer inquiries, reducing staffing costs and increasing service efficiency, which cuts expenses while improving satisfaction. In the longer-term, this could trade as a growth sector with new financial infrastructure on the blockchain, stablecoins and tokenization.
Looking forward, the market will focus on the latest in geopolitics, first quarter earnings, and economic data.
Ketu Desai is the Principal of i-squared Wealth Management Inc. (www.isquaredwealth.com), an investment management firm based in New Jersey. ketu@isquaredwealth.com
