US stock market | Earnings fail to lift stocks amid AI woes

Corporate America just had one of the strongest earnings seasons in recent memory, but if you look at the stock market, you wouldn’t know that. Companies in the S&P 500 grew their profits by 13% in the fourth quarter, nearly six percentage points better than expected. They also offered optimism about the year ahead. The number of companies in the Russell 3000 Index that raised guidance outnumbered those that cut the index by four to one — a level last seen in the wake of recessions or after 2018 tax reform, according to data from Jefferies Financial Group Inc.

And yet the S&P 500 fell in the six weeks bookended by the JPMorgan Chase & Co and Walmart Inc. reports. by 1.7%, marking the worst earnings performance in the past ten quarters.

Part of the problem stems from where the stocks were when the gains started — essentially at record levels thanks to bets on artificial intelligence and signs of solid consumer spending. More alarming, however, is the swirl of uncertainty that has disoriented investors in recent weeks.

The monolithic AI trade, where everything went straight up, turned into a hunt for winners and losers before devolving back into what’s been called the ‘scare trade’ – a rapid repricing of industries thought to be vulnerable to the technology’s applications. At the same time, the likelihood of a US invasion of Iran and the consequences for the global energy market have forced some investors to make safer choices. The problems at Blue Owl Capital Inc have also raised concerns among private credit companies.

“We may be in a ‘buy the rumor, sell the news’ era for the markets, where the great AI/Magnificent Seven bull run of the past three years has driven expectations to a fever pitch,” Michael Bailey, research director at Fulton Breakefield Broenniman, said of the discrepancy between earnings successes and market moves. “In other words, a beat and raise quarter is now a table stake, rather than a reason to celebrate.” The results are solid, but uncertainty around AI and private credit has “dampened” the multiples investors are willing to pay for sectors like software and fintech, said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.

This has caused the S&P 500 to “go sideways,” he added. And while other sectors, including industrials and energy, have achieved higher figures thanks to greater certainty and solid results, Samana notes that these areas do not carry as much weight. Concerns about AI disruption crystallized on Monday, when a bearish report from a little-known firm called Citrini Research – along with a warning from Nassim Taleb – caused a flare-up in the scare trade. International Business Machines Corp was a victim of the sell-off, posting its worst decline in more than 25 years. “Investors are concerned about the future implications of AI, whether it is the investments of the hyperscalers or the potential disruption of software companies and beyond,” said GMO’s Tom Hancock. “None of that showed up in this quarter’s results (and probably won’t in this year’s results), so there is some disconnect between stock returns and current fundamentals.”

Uncertainty around rates is another thing investors should consider. The US SC scrapping Trump’s sweeping global tariffs drew cheers from market participants, but a promise to impose new duties on imports kept the euphoria in check.