Even record-beating earnings can't save the market? U.S. companies deliver their strongest results, yet the S&P 500 has fallen 1.7% in six weeks.
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American companies have just delivered the strongest earnings season results in recent years, but the US stock market did not follow suit. Strong earnings performance and sluggish market trends have created a significant disconnect.
According to Bloomberg, S&P 500 component companies saw fourth-quarter earnings grow by 13%, nearly 6 percentage points above expectations. Yet, during the six-week period bookended by earnings reports from JPMorgan and Walmart, the S&P 500 index fell 1.7%, matching its worst performance over the past 10 earnings seasons.
“Panic trading” triggered by artificial intelligence, global geopolitical risks, and worries about private credit have all weighed on market optimism. Investors are quickly repricing industries susceptible to disruptions from AI technology, causing funds to flow out of overvalued sectors and into safer assets.
Although multiple uncertainties have caused US stocks to remain rangebound in the short term, market participants still believe that the resilience of corporate fundamentals will ultimately guide the market’s direction. Once investors clarify the scope and pace of AI’s disruptive impact, US stocks are expected to regain momentum.
Strong Results Met With Market Indifference
US corporate earnings fundamentals were extremely robust in the fourth quarter. According to Bloomberg citing Jefferies Financial Group Inc., not only did earnings growth outperform expectations, companies were also optimistic about the outlook for next year. In the Russell 3000 index, the ratio of companies raising earnings guidance versus those lowering it reached 4 to 1—last seen after a recession or following 2018’s tax reform.
However, the impressive data did not translate into upward momentum for the stock market. Part of the reason for this is the high level of the market at the outset of earnings season. Driven by the AI boom and expectations of robust consumer spending, US stocks had already been at historic highs.
Michael Bailey, Research Director at Fulton Breakefield Broenniman, pointed out that the market may have entered an era of “buy the rumor, sell the news.” Over the past three years, the bull market in AI and large tech stocks has pushed investor expectations to fever pitch. This means that delivering “beat-and-raise” reports is now just a baseline requirement at the table—not enough cause for market celebration.
AI “Panic Trading” and Multiple Risks Combine
Even more challenging are the multiple uncertainties that have recently distracted investors. According to Bloomberg, what was once a one-sided upward AI trade has now evolved into a process of reselecting winners and losers, recently further morphing into so-called “panic trading”—the market is rapidly repricing industries deemed vulnerable to AI technologies.
This Monday, worries over AI disruption erupted fully. A bearish report from Citrini Research, combined with warnings from Nassim Taleb, sparked a sell-off. International Business Machines became a casualty of this sell-off, posting its largest single-day decline in over 25 years.
In addition to valuation pressure from AI, geopolitical and macroeconomic risks are also pushing investors toward safe havens. Worries about a potential US invasion of Iran and its impact on the global energy market have triggered widespread concern. Meanwhile, troubles at Blue Owl Capital have cast doubt over private credit firms. Moreover, the US Supreme Court’s overturning of Trump’s global tariff policy briefly sparked cheers, but news of his pledge to implement new import taxes quickly dampened market optimism.
Fundamentals Still Expected to Guide the Market
Amid these overlapping risks, the S&P 500 index has recently entered a “sideways” phase. Sameer Samana, Head of Global Equities and Real Assets at Wells Fargo Investment Institute, said that despite robust performance, uncertainties around AI and private credit have lowered investors’ willingness to pay high multiples for software and fintech sectors. While certainty has raised valuations for sectors like industrials and energy, their weights are too small to drive the broader index.
Tom Hancock of GMO added that investors are concerned about the future impact of AI—whether it’s capex by mega tech firms or potential disruption to software companies. Since these worries have yet to show in this quarter’s results, it has caused a disconnect between stock returns and current fundamentals.
Nonetheless, long-term confidence in US corporate fundamentals persists. Samana noted that investors need time to assess the scope and pace of disruption by AI, but he still believes the economy is solid and the market will set new highs in the future.
Bailey is also optimistic. He stated that if companies can meet the consensus growth expectations for 2026 and market sentiment remains stable, US stocks could deliver another impressive performance, with the S&P 500 potentially rising 10% to 15% this year.
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