Retail Investors Are Getting Cautious: Is That Actually a Contrarian Buy Signal?

Retail investors have been highly engaged over the past three years, driving forward the 2023-2025 bull market.

According to research last year from JPMorgan Chase, retail investing flows jumped by 50% from 2023, the start of the bear market, through early 2025.

The trend continued throughout a volatile 2025, as retail investors aggressively bought the dip at levels not seen since the 2020 pandemic, according to research from Bespoke Investment Group.

Image source: Getty Images.

The prevailing logic was that bold policy pronouncements on things like tariffs would be walked back or not fully implemented, and markets would bounce back. Some analyses suggest that retail traders were on to this more than institutional investors, who tend to be more cautious.

Retail investors pull back

But something seems to have flipped with retail investors in recent weeks. They have become more cautious, fearing longer-term negative effects of the war in Iran and geopolitical tensions affecting macroeconomics and markets. That has resulted in a dip in buying the dip, according to research.

JPMorgan Chase strategists reported a 30% drop in retail trading activity for the week of March 12. And for the week of March 19, retail flows fell to $3 billion, well below the 12-month average of $6.8 billion. Overall, according to CNBC, retail stock purchases are 30% lower than before the war in Iran began.

And Vanda Research found that retail investors were net sellers of stocks on March 23, the first time they had seen that since November 2023.

During this retail pullback, markets have been plummeting. The S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) are each down about 4% since the war started, as of April 2.

There could be some rebalancing by pension funds back into equities at the end of March. When markets fall like they have, pensions rebalance back to their mandate ranges, and that would likely mean some stock buying. But when will retail investors buy back in en masse?

There is greater uncertainty about the war's impacts, as many see it as something that cannot be easily unilaterally reversed or modified, which may be why investors are reluctant to dive back in. Further, it could have knock-on effects, potentially leading to higher oil and gas prices, higher inflation, and perhaps delayed interest rate cuts.

The CME Fedwatch poll of interest rate traders, which in December had polled for two cuts in 2026, is now predicting the possibility of rate increases. By December 2026, almost 64% of interest rate traders expect rates to remain at 3.5% to 3.75%, while 31% expect them to be higher, in the 3.75% to 4% range. And 5% project rates are to be 50 basis points higher than they are now by December. Only a minuscule 0.2% anticipate rates to be down to 3.25 to 3.5% by the end of the year.

"Be greedy when others are fearful"

Clearly, investors are spooked right now, but as former Berkshire Hathaway CEO Warren Buffett famously said, "You want to be greedy when others are fearful. You want to be fearful when others are greedy."

Buffett, the noted contrarian, has clearly been more on the fearful side the past few years, selling assets and stockpiling cash. He has since retired, but it will be interesting to see what successor Greg Abel will do now when others are fearful.

It is impossible to know where markets will go from here or how long the malaise will last. But as a long-term investor, if you see an opportunity to buy good stocks at a discount, it is a good idea to jump on them.

When you see a company like Nvidia (NASDAQ: NVDA) with massive earnings power and market dominance in the middle of an AI supercycle, down 10% year to date and trading at 21 times earnings, it should get your attention.

The same goes for Microsoft (NASDAQ: MSFT), down 25% and trading at 20 times forward earnings, or Amazon (NASDAQ: AMZN), down 13% and trading at 25 times forward earnings. If you see proven winners who are dominant in their markets and still generating robust revenue increases available at lower-than-average P/E ratios, they are stocks to consider right now.

But many great values can be found outside of megacap tech stocks. The key is to be selective, watch P/E ratios and valuation metrics, and be cautious. Look for stocks of companies with strong cash flows, consistently steady earnings, and competitive advantages or market leadership.

JPMorgan Chase is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, JPMorgan Chase, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.