Consumer Sentiment, Expected Stock Returns, and Momentum

Employing the Index of Consumer Sentiment (ICS) published by the University of Michigan as the measure of investor sentiment, we investigate its impact on individual stock returns and industry portfolio returns. Consistent with previous studies, we find that the impact of investor sentiment is more concentrated on small stocks than large stocks. More interestingly, investor sentiment seems to be able to predict the momentum payoffs observed in individual stock returns, which remains true even after investor sentiment is adjusted by a set of macroeconomic variables. In a stark contrast, investor sentiment does not show any evidence of affecting industry portfolio returns and neither does it capture the industry momentum