During the year 2025, the momentum in the stock market was driven by retail investors in the United States. According to CNN, retail investors took advantage of the "tariff tantrum" and bought equities, thereby capitalising on the strong bounce and move to all-time highs.
This occurred even though institutional investors were concerned, and huge funds were allegedly taking a cautious stance.
For the first time in a significant amount of time, ordinary investors showed a greater understanding of the potential than large funds who were influenced by the narrative that attacked Trump.
Bloomberg mentions the underperformance of retail investors in comparison to institutional players during months of higher market volatility. This is even though the year-to-date returns have been solid. How come?
The answer to this question is self-evident: retail investors typically engage in more concentrated portfolios. Not as clear is the fact that retail investors prefer tech giants, which are the primary drivers of both the boom and the recession cycles.
Market Momentum Driven by Retail Investors
According to Vanda Research, retail investors in the United States invested a total of $155.3 billion in single stocks and exchange-traded funds (ETFs) during the first half of 2025.
This was the primary factor that drove the market momentum in the consumer discretionary and technology sectors.
According to survey data that was collected by FTSE Russell in June 2025, retail investors had a bullish position about their portfolios, with 55% of them being bullish.
Additionally, 42% of retail investors were optimistic regarding the economy and the broad US equity market.
CNN demonstrated that the emotion of huge funds and institutions was more closely associated with "fear" than it was with "greed" at the same time. It was obvious.
The confirmation bias against the United States that was reported in mainstream media had less of an impact on retail investors, and they were the ones who led the recovery even before the economic numbers for the United States began to beat their competitor stocks.
The evidence from the year 2025 demonstrates that retail investors have been more intelligent and less biased than institutional corporations
According to the Financial Industry Regulatory Authority (FINRA), margin debt has skyrocketed in 2025, reaching a record $1.126 trillion in September. This represents a 6.3% increase from the previous month and an astounding 38.5% increase year-over-year.
Consequently, this indicates that retail investors employ higher amounts of leverage. For this, there are two reasons to consider: Retail investors appeared to have the expectation that interest rates will decrease, as opposed to the worry that many institutions have regarding the possibility of rate increases.
The evidence from the year 2025 demonstrates that retail investors have been more intelligent and less biased than institutional corporations, which have been overly focused on political narratives that have never taken place.
The Most Significant Danger for Market Participants: Confirmation Bias
There is a fact that retail investors experience a greater degree of volatility. It is not unusual. As a result of their concentration of investments in "hot" sectors, retail investors have fewer cushioning options available to them in the event of a downturn.
We need to disregard white noise and political bias and pay more attention to the realities of macro and earnings - Daniel Lacalle
The ability of retail investors to adapt their portfolios in response to a downturn or change in macrotrends is lower than that of institutional investors; yet retail investors have proven better at disregarding political biases and white noise.
Most of us can learn a valuable lesson from this. These institutions have been pushed to ignore the powerful patterns of earnings, technological advancement, and the strengths of the United States economy due to the phenomenon known as confirmation bias.
The biased Keynesian analysis that continually sounds doom alarms when Republicans are in control and never talks about debt or macro dangers with Democrats is receiving an excessive amount of attention from large organisations.
Since confirmation bias is the most significant danger for market participants, the information that has been gathered over the previous few months suggests that large institutions should forgo political narratives and instead maintain a greater focus on fundamentals.
We need to disregard white noise and political bias and pay more attention to the realities of macro and earnings, which is a great lesson that we have learnt from what we have seen in 2025.
Although retail investors may not create the same returns as institutions in the long run, there is a powerful lesson that we have learnt from what we have seen.
