Even as U.S. stocks power through record highs, Citigroup analysts say investors are struggling to trust the rally. The market may be booming, but conviction is in short supply.

According to Scott Chronert, the bank’s head of U.S. equity strategy, the latest leg of the bull market is being driven less by optimism and more by obligation. “Investors aren’t charging into equities with confidence—they’re staying invested because there’s nowhere else to go,” he told clients during a recent global tour that gauged sentiment among institutional investors in the U.S. and Australia.

A Market Fueled by Doubt

Citigroup’s team described the current backdrop as a “reluctant rally.” Fears of overvaluation, a potential AI bubble, and mixed economic signals continue to linger. Yet portfolios remain packed with large-cap U.S. stocks, particularly the dominant names in tech that have defined this bull cycle.

This contradiction—skeptical investors holding near-record stock exposure—has created what Chronert calls a “classic wall of worry.” Markets keep climbing as pessimists hesitate to participate fully, rewarding any positive headlines while reacting sharply to negative ones.

Sentiment Split: Euphoric Positioning, Anxious Minds

While mood surveys show a lack of exuberance, Citigroup’s internal Levkovich Index, which tracks investor positioning, paints a very different picture. The index is now hovering near levels last seen during the dot-com era and the post-pandemic rebound, signaling that money managers may be far more bullish in behavior than they admit publicly.

That disconnect, Citigroup warns, can make markets fragile. When sentiment and positioning diverge this widely, sudden corrections tend to be sharper, particularly once enthusiasm fades or data disappoints.

Valuations Stretch as Bull Market Ages

Despite these tensions, stocks continue to climb. The S&P 500 recently crossed 6,850, surpassing Citigroup’s previous year-end target of 6,600. The index is now trading at roughly 22.7 times forward earnings, well above its long-term average.

Chronert views the market as “fully priced,” saying most of next year’s expected earnings rebound is already factored in. Citigroup’s bullish scenario—an S&P 500 reaching 7,200—would require stronger corporate profits and an expansion of valuation multiples that could be difficult to justify in a maturing cycle.

Volatility May Lurk Beneath the Calm

For now, volatility appears muted. The VIX index, Wall Street’s favored gauge of fear, remains around 16, its lowest level this month. But Citigroup cautions that the calm may not last. Investors’ heavy equity positioning, combined with widespread anxiety about credit markets and economic growth, could make the next downturn feel sudden and severe.

Global Capital Still Flocks to U.S. Equities

Outside the United States, foreign investors remain deeply tied to American markets. Citigroup’s data shows the U.S. now accounts for about 63% of the MSCI All Country World Index, underscoring Wall Street’s dominance in global portfolios. Even as valuations climb, the lack of compelling alternatives continues to pull money back into U.S. assets.

For Citigroup, this dynamic encapsulates the paradox of the modern bull market: investors fear it’s gone too far but still can’t afford to walk away. As Chronert puts it, the market’s ascent may not end with euphoria—it may end when exhaustion finally replaces doubt.