In September 2025, we developed a forecast for investor sentiment for 2026. This update compares current 2026 market behavior with the AFP forecast we published last September. The forecast identified three Anxiety-Free Periods, or AFPs, with specific dates. The forecast is based on physics-based drivers of investment sentiment that are described in this paper:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5482086AFP clusters are rare events. The last one occurred in 2017/8. The next one is expected to take place in 2033.
We use the term AFP to describe periods when investor anxiety is expected to be unusually low, making markets more susceptible to euphoria-driven advances and later reversals. The three AFPs of the 2026 cluster are shown in Figure 1. The height of each AFP column reflects the expected relative intensity of the sentiment effect.
We track actual investor sentiment using Market Resilience Indexes, or MRI. These metrics measure stock index price acceleration, which we use as an indicator of whether investors are becoming more optimistic or more pessimistic in responding to economic and market news. Figure 2 shows short-term price acceleration, as indicated by the Micro MRI, for ETFs tracking major US stock market indexes from the beginning of 2026 through July 3, 2026.
Figure 2
The Micro MRI readings in Figure 2 are normalized on a 0.0 to 1.0 scale using history from 2000 to date. The vertical red line marks the beginning of the Iran conflict, on February 27, 2026. Falling Micro MRI readings indicate weakening short-term price acceleration. Rising readings indicate strengthening short-term price acceleration. Many MRI readings were already moving lower before the start of the Iran conflict, indicating that investors were becoming more likely to react aggressively to negative news. All of the major index MRI readings reached extremely low levels in March.Consistent with the September forecast, the market entered a period of strong optimism in April. The most visible driver was the AI theme, best represented by QQQ, which tracks the Nasdaq 100. However, Micro MRI readings rose across all major index ETFs, suggesting the rapid shift to optimism was broader than AI alone.
The strongest AI-related momentum appears to have ended shortly after the first AFP peaked, as shown by the decline in the QQQ Micro MRI and the subsequent weakening in QQQ price performance. That pattern is consistent with the September forecast.
The current period between the first two AFPs, with Micro MRI readings trending lower, is a period in which the market may be more vulnerable to declines when confronted with negative economic, earnings, or geopolitical news. That pattern is consistent with our view that economic conditions largely determine the magnitude of price moves, while physics-based sentiment drivers affect their timing.
Figure 3 shows ETF performance over the same period. QQQ moved lower after the peak of the first AFP, while the DJIA continued to move higher.
Figure 3
The DJIA, which has relatively little exposure to the AI theme, has continued to move higher during this period. The S&P 500, with greater exposure to AI and technology stocks, has weakened since the price peak that occurred shortly after the first AFP peaked.
The next major window of market vulnerability occurs in December, near the end of the three-AFP cluster.In short, 2026 market behavior has so far been broadly consistent with the September AFP forecast: a sharp rebound in optimism into the first AFP, followed by weakening Micro MRI readings and a more vulnerable period between AFPs. We will continue to monitor whether the second and third AFPs produce a similar pattern of sentiment-driven resilience followed by vulnerability.
This framework is not intended to forecast specific price levels. Its purpose is to identify periods when investor sentiment may amplify or mute the market’s response to economic, earnings, and geopolitical conditions.
