By Jacob Sonenshine

The stock market has an Nvidia problem.

Anyone who read the chip maker's earnings might assume the market would rise. Nvidia beat earnings forecasts, is seeing fast growth for its high-margin data-center chips, and even guided for $78 billion in first-quarter sales -- $5 billion above expectations. The stock, however, dropped 9% for the last two days of this week, helping to lead the market lower.

The Dow Jones Industrial Average is down 1.6% for the week, and was on pace for its worst week since late November, while the Nasdaq Composite fell 1.3% and the S&P 500 index declined 0.8%.

"The [AI] trade has gotten stretched," says Kenny Polcari, veteran trader and chief market strategist at SlateStone Wealth.

If only the market didn't have other things to worry about. Private-credit fears have hit financial stocks. January's producer price index revealed hotter-than-expected cost inflation. A U.S. attack on Iran could be in the works. And the administration is increasing base tariffs on imports moving into the U.S.

But ultimately it comes back to earnings, especially profit margins. While nothing in Nvidia's earnings call pointed to slowing data-center growth -- one of the market's greatest fears -- its 75% full-year gross margin guidance beat estimates by only a few tenths of a percentage point.

And it's not just Nvidia whose margins could be peaking -- or even coming under pressure. Aggregate reported gross margins for S&P 500 companies -- excluding financials and real estate companies -- recently dropped to roughly 45% from a multidecade peak of over 47% in 2021, according to Trivariate Research. Gross margins are important because they're a key indicator of a company's future earnings. Lower ones indicate each product or service it offers is inherently less profitable and is often consistent with waning demand and growth, even if net margins, which companies can boost through cost cutting, suggest everything is fine.

There's a direct link between margins and valuations. Price/earnings multiples are largely higher for companies with fatter gross margins, Trivariate's data show, so disappointments on margins would reduce multiples -- and cause individual stocks to fall.

The result: The S&P 500 has gone nowhere for the past two months. To Frank Cappelleri, market technician and founder of CappThesis, the selling suggests a market that looks "toppy." Unless something changes for the better, selloffs could resurface when the index hits 7000, putting a "potential bearish pattern" in play.

No bell has rung just yet. The S&P 500 is still holding key support between 6750 and 6800, Cappelleri says. But anything below that level opens the door to an even larger drop. Beyond that, the next key level to watch would be 6538, where buyers stepped in after a decline in late November. That's about 5% below the current level. By contrast, the iShares MSCI ACWI ex US exchange-traded fund, which holds non-U.S. stocks, rose 0.4% this past week.

Stocks have little margin for error now -- and the problem might be us.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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(END) Dow Jones Newswires

February 27, 2026 21:31 ET (02:31 GMT)

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