Strong financial reports are unable to support U.S. stocks, AI and credit concerns are becoming upward resistance.

It is noticed that the American corporate sector has just delivered one of the strongest financial reporting seasons in memory, but investors may find it difficult to discern this just by looking at the stock market performance. Companies in the S&P 500 Index reported a 13% increase in profits in the fourth quarter, nearly 6 percentage points higher than expected. At the same time, these companies also showed optimism for the upcoming year. According to Jefferies' data, the ratio of companies in the Russell 3000 Index that raised earnings guidance to those that lowered guidance was 4:1 - a level not seen since the end of the economic recession or the 2018 tax reform. However, over the six-week period when JPMorgan Chase and Walmart released their financial reports, the S&P 500 Index fell by 1.7% - equaling the worst performance during earnings season in the past 10 quarters. Despite strong performance, the S&P 500 Index is still underperforming. Part of the reason for this is the position of the stock market at the beginning of earnings season. Due to market bets on artificial intelligence and signs of robust consumer spending, stock prices were already at historical highs. But more concerning are the various uncertainties that have made investors dizzy in recent weeks. What was once a uniform, upward AI trading trend has now evolved into a game of finding winners and losers, and then swung back to what is known as "panic trading" - rapid repricing of industries believed to be easily impacted by AI applications. Meanwhile, the possibility of U.S. invasion of Iran and its impact on the global energy market has caused some investors to turn to safer bets. Troubles at Blue Owl Capital Inc. have also raised concerns in the market about private credit companies. "Perhaps we are in a market environment where it's 'buy the rumor, sell the fact.' The bull market in AI and the 'Big Seven of U.S. stocks' in the past three years has raised market expectations to a fever pitch," said Michael Bailey, research director at Fulton Breakefield Broenniman, commenting on the disconnect between earnings success and market trends. "In other words, delivering 'earnings above expectations and raising guidance' is now just the entry point, not a reason for celebration anymore." Samir Samana, director of global equities and real assets at Wells Fargo Investment Institute, said that while earnings were steady, uncertainties surrounding AI and private credit have "pressed down" valuation multiples that investors are willing to pay for sectors like software and fintech. He added that this has caused the S&P 500 Index to trade in a "sideways consolidation" pattern. Although other sectors such as industrials and energy have received higher valuations due to higher certainty and strong performance, Samana pointed out that these sectors do not carry much weight in the index. Concerns about the disruptive potential of AI materialized on Monday. A bearish report released by a company called Citrini Research, along with warnings from Nassim Taleb, sparked a wave of "panic trading." IBM became a casualty of the sell-off, experiencing its largest single-day drop in over 25 years. "Investors are worried about the future impact of AI, whether it be capital expenditure pressures from mega-scale cloud service providers or potential disruption to software companies and other industries," said Tom Hancock of GMO. "These concerns were not reflected in this quarter's earnings (and may not be reflected this year), leading to a certain degree of disconnect between stock return and current fundamentals." Uncertainty surrounding tariffs is another factor investors must consider. The Supreme Court overturning Trump's comprehensive global tariff plan was met with cheers from market participants, but promises of levying new import taxes that followed dampened this optimism. While traders need to consider multiple factors, the market still holds confidence that the fundamentals of American companies will ultimately prevail. Traders may just need to wait for a while. Samana explained, "Investors need time to figure out the scope and pace of AI disruption." He added that investors will eventually agree with his view that the economic conditions are "robust, with room for further innovation in the future." Bailey concurred and noted that, under the right conditions, the S&P 500 Index could potentially see another exciting rally. "If companies can meet the consensus growth expectations as vigorously as they did in 2026, and market sentiment remains the same, we could see another impressive market performance with the S&P 500 Index poised to rise by 10% to 15% this year," Bailey said.