Traders Think Stocks Are Overpriced – but They’re Still Buying

What do you do if large-cap stocks are richly valued but you feel like there’s no alternative? If you’re like most traders, you’ll just end up buying them anyway even though you know better.

According to the Charles Schwab Trader Sentiment Survey for 2025’s first quarter, which comprised 1,040 Active Trader clients, two-thirds of traders believe that the market is currently overvalued. Moreover, they point to mega-cap tech and AI stocks as being among the most crowded trades.

Now, you might think that if traders believe that large-cap stock values are frothy, they would avoid that trade and seek gains elsewhere – right? Evidently not, as 51% of traders were bullish on these stocks while only 34% were bearish.

James Kostulias, head of Trading Services at Charles Schwab, summed it up when he remarked, “It’s clear that the majority of traders believe there’s some froth in the market but on balance they also feel like there’s still more room for the bulls to run.” Kostulias also reported that over half of traders “plan to move additional money into stocks in Q1.”

When I first read Schwab’s report, I immediately suspected that young, app-using stock traders were driving the latest surge in optimistic sentiment. As it turned out, Kostulias found a “strong increase in bullishness among younger traders at Schwab” in the survey.

Courtesy: Charles Schwab

Interestingly, the survey concluded that traders were the most bullish on energy, information technology, finance, and utilities stocks. This makes sense, though, since Kostulias noted that traders “are likely reacting to sectors they believe stand to benefit from the new administration in Washington.”

For example, they probably heard somewhere that President Trump said, “Drill, baby, drill,” so they’re bullish on energy stocks. Or, they feel that Trump will deregulate the banking sector, so they want to buy financial stocks.

You may have noticed from the chart shown above that only 20% of traders felt bullish about the real estate sector. I suspect it’s because housing is unaffordable for many Americans nowadays, and traders are expressing their frustration through bearish sentiment.

Additionally, the survey found increased bullish sentiment on cryptocurrencies as well as spot crypto ETFs. This is likely due to the Trump administration’s pro-crypto stance in addition to Bitcoin reaching $100,000 earlier this year.

Here’s where I see a contrarian investment opportunity. Believe it or not, only 16% of traders in the survey were bullish about international stocks. Meanwhile, 57% were bullish on domestic (U.S.) stocks.

This trend has persisted for a while, with American stock traders loading up on U.S. stocks and disregarding international stocks. Contrarian investors should consider the whole world as their domain, not just one country, and there’s strong growth potential in certain emerging markets such as India.

Courtesy: Yahoo Finance

This isn’t to suggest that today’s traders are completely irrational, though. As the survey found, 54% of traders are bullish on value stocks, so that’s a good sign. Also, only 11% of traders were bullish about meme stocks, which are known to be highly risky.

Along with international stocks, traders seem to be overlooking health care stocks in Q1 2025. Since only 30% of traders were found to be bullish about health care stocks, this piques my interest as a contrarian investor.

Furthermore, only 36% of traders were bullish on commodities. That’s surprising, since they’re apparently bullish about the energy sector. In any case, I suspect that a shift in sentiment toward commodities could have a powerful, positive impact on the gold, silver, and uranium prices this year.

Finally, the report didn’t mention small-cap stocks at all. One can only wonder how the traders in the survey would have responded to questions about small-cap stocks, which I believe offer the potential for outsized returns if you know which stocks to pick today.