Cautious Investors Are a Bullish Market Signal

High Sector Correlations Reveal Underlying Market Caution

The S&P 500 may be on track for another record high by Friday, but not all is calm beneath the surface. According to Nicholas Colas, co-founder of DataTrek Research, unusually high sector correlations point to lingering investor caution.

Colas examines how closely different stock sectors move in tandem with the broader market as a way to gauge sentiment. While all sectors tend to show some correlation over short periods — since they’re ultimately tied to the same economic forces — spikes in correlation often signal elevated uncertainty.

To track this, Colas looked at the 30-day trailing correlations between the S&P 500 and five key sectors: consumer discretionary, financials, health care, industrials, and technology. The average of these correlations currently sits at 0.86, above the long-term norm of 0.81.

Historically, high correlation levels have coincided with macro stress — such as the Fed’s 2018 policy misstep or the tariff shock in April 2025, when correlations surged to 0.95.

Colas draws three conclusions from today’s elevated readings:

1. Residual Shock: April’s tariff surprise had a lasting impact, resetting correlation levels higher even after markets rebounded.
2. Cautious Allocation: Despite a 5.1% gain in the S&P 500 over the past month, investors aren’t showing strong conviction. High correlations suggest they’re still hesitant to bet aggressively on specific sectors.
3. Unresolved Risks: Concerns around trade policy, inflation, Federal Reserve decisions, and slowing economic growth remain unresolved — and that’s keeping correlation elevated.

“The S&P 500’s price action may suggest stability,” Colas notes, “but correlations are flashing caution.” Still, he sees a silver lining: as macro uncertainties clear, investor confidence — and sector selectivity — could return.