Better-than-expected performance can't save the market? U.S. companies deliver their strongest results, yet the S&P 500 has fallen 1.7% in six weeks

The U.S. companies just delivered their strongest earnings season in recent years, but the stock market has not followed suit. Strong profit performance has become significantly decoupled from the sluggish market trend.

According to Bloomberg, S&P 500 companies’ earnings grew by 13% in the fourth quarter, nearly 6 percentage points above expectations. However, during the six-week period from the release of earnings reports by JPMorgan Chase and Walmart, the S&P 500 index declined by 1.7%, matching the worst performance during earnings seasons over the past 10 quarters.

Panic trading triggered by artificial intelligence, global geopolitical risks, and concerns over private credit have collectively suppressed market optimism. Investors are rapidly repricing industries vulnerable to AI technology impacts, leading to capital outflows from high-valuation sectors into safer assets.

Despite short-term uncertainties causing sideways movement in U.S. stocks, market participants still believe that corporate fundamentals’ resilience will ultimately steer the market. Once investors clarify the scope and pace of AI’s disruptive effects, U.S. stocks are expected to regain upward momentum.

Strong earnings face market skepticism

U.S. corporate earnings in the fourth quarter were fundamentally very solid. Bloomberg, citing Jefferies Financial Group Inc., reports that not only did earnings growth surpass expectations, but companies are also optimistic about next year’s profit outlook. In the Russell 3000, the ratio of companies raising guidance to those lowering guidance reached 4:1 — a level last seen after a recession or following the 2018 tax reform.

However, these impressive data did not translate into stock market gains. Part of the reason is that the market was already at a high when earnings season began. Driven by the AI boom and expectations of steady consumer spending, U.S. stocks had already reached 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 fact.” Over the past three years, the bull market in AI and large tech stocks has pushed investor expectations to a fever pitch. This means that “beating expectations and raising guidance” reports are now just basic chips on the table, no longer enough to justify market celebration.

AI panic trading and multiple risks stacking up

A more severe challenge comes from recent uncertainties that have disrupted investor focus. Bloomberg reports that the once one-sided AI trading has evolved into a re-evaluation of winners and losers, and recently has further shifted into so-called “panic trading” — markets are rapidly re-pricing sectors believed to be vulnerable to AI impacts.

This Monday, fears of AI disruption fully erupted. An organization called Citrini Research issued a bearish report, coupled with warnings from Nassim Taleb, sparking a sell-off. International Business Machines (IBM) became a casualty, experiencing its largest single-day decline in over 25 years.

In addition to valuation pressures from AI, geopolitical and macroeconomic risks have prompted investors to seek safe havens. Concerns over a potential U.S. invasion of Iran and its possible impact on global energy markets have sparked widespread worry. Meanwhile, troubles faced by Blue Owl Capital have raised doubts about private credit firms. Furthermore, the U.S. Supreme Court’s reversal of Trump’s global tariffs, which initially boosted market optimism, was quickly dampened by his promise to implement new import taxes.

Fundamentals still expected to guide the market

Amid multiple risks, the S&P 500 has recently been in a “range-bound” state. Sameer Samana, head of global stocks and real assets at Wells Fargo Investment Institute, said that although earnings are solid, uncertainties around AI and private credit have weakened investors’ willingness to pay high valuations for sectors like software and fintech. While sectors like industrials and energy have seen valuation increases due to higher certainty, their weightings are insufficient to move the broader market.

GMO’s Tom Hancock added that investors are worried about AI’s future impact, whether it’s the capital expenditure of mega tech firms or potential disruptions to software companies. Since these concerns are not yet reflected in quarterly results, stock returns are decoupled from current fundamentals.

Nevertheless, long-term confidence in U.S. corporate fundamentals remains intact. Samana noted that investors need time to assess the scope and pace of AI disruption, but he believes the economy remains resilient and that the market will continue to reach new highs.

Bailey also remains optimistic. He stated that if companies can achieve the consensus growth expectations for 2026 and market sentiment remains stable, U.S. stocks could deliver another impressive performance, with the S&P 500 potentially rising 10% to 15% this year.

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