Let’s put a finger on the market’s pulse.

Economically, the closest thing to a tough year for the U.S. recently was 2022. While the market has largely moved past that year’s recession debate, it’s worth noting that the traditional definition that persisted for all our careers—two consecutive quarters of negative GDP growth—did occur in the first half of 2022.

The Philly Fed’s “Anxious Index” surveys economists on whether the next quarter will see negative GDP growth. At the height of worry in 2022, 47% said yes; now it’s just 15%. Historical patterns are encouraging. We looked at seven instances when economic sentiment flipped from high anxiety to low (Q4/1970, Q3/1975, Q1/1983, Q2/1992, Q2/2002, Q4/2009, and Q1/2021). Each occurred as a recession was ending or had just ended, and in all cases, the S&P 500 had gains over the following 12 months. For context, historical data show that if you were to select any random four-quarter period for the S&P 500 since 1968, there is roughly a 21% chance your selected window of time witnessed a loss. If the next year mirrors the prior observations, investors have black ink in store for 2025.

However, caution is warranted; according to the latest BofA Global Fund Manager Survey, several contrarian signals have emerged. A net 14% of respondents were underweight cash in December, the lowest level since the question was introduced in 2001, and cash allocations fell to 3.9%, matching the last notable low in June 2021. Additionally, investment professionals’ overweight position in U.S. equities relative to Europe has reached a 12-year high. That leaves room for a contrarian rally in European equities that could catch many off guard, including us (our model portfolios are underweight the region).

Despite the perception of euphoria around U.S. stocks, other surveys paint a mixed picture. The American Association of Individual Investors finds 38% of respondents are bullish vs. 34% bearish—a modest 4% gap that sits in the 42nd percentile of historical readings since 1987. Similarly, the Investors Intelligence poll of newsletter writers shows 54% are bullish, down from 63% post-Thanksgiving. Bears are scarce at 18%, with a 36-point bull-bear gap that, while seemingly high, sits in the 84th percentile historically—still around the broad middle of the sentiment curve.

One emerging consensus should have some more holes poked in it: the belief that tariffs and deportations are necessarily inflationary. Tell it to the market. Energy and Basic Materials—two sectors often tied to inflation expectations—have remained flat over the past year, even as the S&P 500 delivered a 23% total return. Higher import prices and wages might dominate headlines but think about other effects of potential population decline: fewer occupied apartments, a de-clog at the emergency room, fewer drivers wearing and tearing the roads, and so on.

For stock market sentiment, we saved the most concerning sentiment indicator for last: The Conference Board’s December survey found an unprecedented level of public optimism. Respondents expecting the market to rise in the next 12 months outnumber those expecting stagnation or decline by 12.8 percentage points, shattering the previous record of 2.0% set in January 2018. Uncharted waters like these demand a sturdy ship—and ignoring downside protection in 2025 may be a risk no prudent investor can afford to take. History has shown that markets at euphoric peaks can reverse sharply, so make sure your portfolio is equipped with life rafts.