The recent wobble in stocks has revealed signs of anxiety in markets, in what some investors consider a mere stumble and others an indication of worse to come.
The S&P 500 fell more than 1 percent in early trading on Friday. The index is on course for a second straight weekly decline for the first time since June. But stocks are still close to record highs, reflecting a curious mix of optimism and worry among investors as they try to plot the direction of markets.
On the plus side, companies in the S&P 500 are set to record a fourth straight quarter of double-digit earnings growth, according to FactSet, a feat last achieved in 2021, during the burst of activity after the end of pandemic lockdowns.
More than 90 percent of companies on the S&P 500 have released their financial results for the third quarter, reporting an average earnings growth of 13 percent compared with last year. The index is also about 13 percent higher from a year ago.
And although executives try to steer analysts’ earnings expectations to levels that they can beat — part of the farce of the quarterly earnings season — the share of companies beating those expectations has been higher than normal, a meaningful signal for investors.
“We are seeing companies doing better than expected and that supports these valuations,” said Alan McKnight, chief investment officer at Regions Bank.
However, worries linger about how long this can last.
Wary of high valuations and potential market potholes, investors are punishing companies that miss earnings expectations more harshly than usual, which some analysts say is an indicator that they are more attuned to signs of stress than shows of strength. On average, companies in the S&P 500 that missed earnings expectations by more than 2 percent fell roughly 4 percent immediately after, while those that beat expectations by more than 2 percent gained only just over 1 percent, according to data from Fundstrat and FactSet.
It is hard not to worry, investors said, when valuations have risen so quickly, propelled by bets on the profit potential of artificial intelligence. Kristina Hooper, chief market strategist at Man Group, pointed to the surge in gold prices this year as another sign of underlying worry, despite stock markets also rising at the same time.
“That is a bipolar market environment where you have fear of missing out at the same time as real fear,” she said.
She also worries about the dependence of the market and the economy on the growth of A.I., which has attracted hundreds of billions of dollars in investment, bolstering economic growth and pushing the value of major industry players to unprecedented heights.
A basket of A.I.-linked stocks tracked by Jefferies, an investment bank, has underperformed on the S&P 500 this month, as investors have appeared to shift their attention to other parts of the market.
Toward the end of the year, investors also typically look to book profits on winning trades, dialing down their appetite for new investments.
“I think we are in the final innings before a significant drawdown,” Ms. Hooper said.
Investors are also fretting about the effects of a growing economic divide between those who have profited from the roaring market rally and those with lower incomes and little exposure to stocks, who continue to struggle as inflation remains stubborn and the labor market slows.
“The gap between high and low income consumers just keeps widening,” said Hardika Singh, a market strategist at Fundstrat. That suggests that the economy may not be on the sturdiest of foundations: The top 10 percent of U.S. households now account for nearly half of all spending, the highest share since the late 1980s, according to Moody’s Analytics.
The lingering impact of the longest-ever government shutdown, which postponed the release of widely followed economic data reports, is also on investors’ minds.
Few companies on the S&P 500 noted any significant effects on their businesses from the shutdown. But the index includes only the biggest companies in the country, which are generally better able to deal with economic shocks.
Smaller companies have seemed to fare worse. The Russell 2000 index, which tracks smaller public companies, is on course for its third straight week of losses, its longest losing streak since March.
Next week, major earnings reports could further test investors’ ability to balance competing narratives, with high-flying Nvidia, the standard-bearer of the A.I. boom, releasing results alongside the retailers Walmart and Target, bellwethers for lower-income consumers squeezed by the economy.
“As pleased as we have been,” Mr. McKnight of Regions Bank said, “our big question as we start next week and into late November and December is are the retailers feeling a pinch? Are they seeing a pullback from the consumer?”
Joe Rennison writes about financial markets, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders.
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