While the ongoing AI rally and a strong second-quarter earnings season have recently propelled the major indices to new all-time highs, stocks might owe average joes a debt of gratitude for buoying the bull market.
That’s because this year, when volatility has spiked — whether on news of tariff deadlines, geopolitical conflict, weak macroeconomic data or creeping inflation — retail investors have repeatedly bought the dip hand over fist.
That trend has been so well-pronounced that it’s now confounding Wall Street pros.
How everyday investors are driving stocks higher
Financier J.P. Morgan once said that “in a bear market, stocks return to their rightful owners.” The implication is that when the market cycle passes its peak and begins to turn bearish, negative sentiment sparks fear-induced selloffs that result in retail investors dumping shares — often at a loss — and institutional or accredited investors buying them at steep discounts.
Historically, that has been the case. When the markets experience heightened volatility, precedent says everyday investors run for the hills. But in 2025, that hasn’t been happening.
“It’s confusing institutional investors completely at this point,” Mark Hackett, chief market strategist at Nationwide Investment Management Group, told MarketWatch, adding that retail investors have been conditioned to buy the dip by taking advantage of price declines with the expectation of an eventual rebound.
Some of that may be attributed to the increase in Americans owning stocks. According to Gallup, 62% of U.S. adults hold shares, up from 52% in 2016.
This year, they’ve been exceptionally active. In April, when the major indices were cliff-diving towards corrections, retail investors injected $7.32 billion into U.S. equities resulting in a dramatic V-shaped recovery. The world’s largest index fund — the Vanguard S&P 500 ETF (VOO) — saw inflows of $3.25 billion that month alone.
More recently, in late July, a subpar jobs report and a looming tariff deadline sparked another (albeit less severe) sell-off. The S&P 500 fell 2.38% from July 28 to Aug. 1. Again, everyday investors stepped in, bought the dip and sparked another V-shaped recovery. Since that Aug. 1 bottom, the index is now up 2.68%.
Hackett said looking back to April and May, institutions were “completely on the sidelines.” Yet retail investors were aggressively buying pullbacks.
“It’s worked so many times, at this point, the retail investor has fueled this sense of inevitability about recoveries,” Hackett told MarketWatch.
Stock valuations could point to market trouble
Whether these recoveries are part of a pattern shielding the market from an overdue correction remains to be seen. But many analysts are in agreement that stock valuations are pushing their upper limits.
According to data analytics firm VettaFi, the summary of market valuations was at its highest level in history at the end of last month, with a current average that is more than three standard deviations above its historical mean.
So while retail investors may be keeping the current bull market — which began in October 2022 — afloat, they could also be propping up stocks that are due for declines as part of the natural market cycle.
Take, for example, AI platform developer Palantir (PLTR), which is up nearly 144% year to date and 1,892.66% since its October 2020 IPO. The stock’s eye-catching gains have led to a remarkably high price-to-earnings (P/E) ratio — a measure of what investors are willing to pay in exchange for one dollar of a company’s earnings.
On a trailing 12-month (TTM) basis, Palantir’s P/E ratio is 623.20, meaning that over the past year, investors have paid $623.20 for every $1 the company earned. Meanwhile, the S&P 500’s TTM P/E ratio of 29.49 is more than 64% higher than its historical average of 17.96.
That does not, however, suggest a market correction is imminent.
“As we’ve frequently pointed out, these indicators aren’t useful as short-term signals of market direction. Periods of over- and under-valuation can last for many years,” Jennifer Nash, economic and market research analyst at VettaFi, wrote in a note. “But they can play a role in framing longer-term expectations of investment returns.”
Despite elevated valuations, retail investors — at least for now — are being rewarded for their bullishness. The S&P 500 is up nearly 29% since its year-to-date low in April.
More from Money:
Are Your 401(k) Investments Too Conservative?
We Asked AI Which Stocks to Buy in August. Here’s What It Said
What Financial Advisors Are Telling America’s Richest People to Do With Their Money
According to a report from Money.com, our team conducts thorough research on all brands listed on our platform and may receive compensation from our partners. This research and financial considerations may impact how these brands are displayed. It is important to note that not all brands are included in our research. To learn more about our process, please visit our website.
Despite recent record highs in the stock market, it may be everyday investors who are responsible for keeping the bull market afloat. This year, during times of increased volatility, retail investors have consistently bought the dip, defying historical trends. This trend has even puzzled Wall Street professionals.
As J.P. Morgan once said, “in a bear market, stocks return to their rightful owners.” This means that when the market turns bearish, negative sentiment causes retail investors to sell their shares at a loss, while institutional or accredited investors buy them at discounted prices. However, in 2025, this has not been the case. Retail investors have been conditioned to buy the dip, taking advantage of price declines with the expectation of a rebound.
One possible explanation for this behavior is the increase in the number of Americans who own stocks. According to Gallup, 62% of U.S. adults currently hold shares, up from 52% in 2016. This year, these investors have been particularly active. In April, when the market was experiencing a sharp decline, retail investors injected $7.32 billion into U.S. equities, resulting in a quick recovery. The Vanguard S&P 500 ETF (VOO), the world’s largest index fund, saw inflows of $3.25 billion that month alone. More recently, in late July, a weak jobs report and looming tariff deadline caused another sell-off. Once again, retail investors stepped in, bought the dip, and sparked a recovery. Since the bottom on August 1st, the S&P 500 has risen 2.68%.
Mark Hackett, chief market strategist at Nationwide Investment Management Group, believes that institutions were “completely on the sidelines” during the April and May recoveries, while retail investors were aggressively buying pullbacks. He suggests that this behavior has created a sense of inevitability about market recoveries.
However, some analysts warn that stock valuations are reaching their upper limits, which could lead to a market correction. Only time will tell if this pattern of retail investors buying the dip will continue to shield the market from a potential downturn.
Source:Read More