The U.S. corporate sector has just delivered one of its strongest earnings seasons in recent memory, yet judging by stock market performance alone, investors might hardly notice. Companies in the S&P 500 saw their profits grow by 13% in the fourth quarter, surpassing expectations by nearly 6 percentage points. At the same time, these firms expressed optimism about the year ahead. According to Jefferies data, the ratio of companies raising their earnings guidance versus those lowering it within the Russell 3000 index stood at 4 to 1—a level last seen after the end of a recession or following the 2018 tax reforms.

However, over the six-week period during which JPMorgan and Walmart reported their results, the S&P 500 declined by 1.7%—matching its weakest performance during an earnings season in the past 10 quarters. Part of the reason for the index's underperformance despite strong results lies in where stocks stood at the start of earnings season—prices were near all-time highs due to bets on artificial intelligence and signs of robust consumer spending.

But more concerning are the uncertainties that have recently unsettled investors. What began as a uniform, broad-based rally in AI-related trades has evolved into a search for winners and losers, and later shifted into so-called "panic trading"—a rapid repricing of sectors perceived as vulnerable to AI disruption. At the same time, the possibility of a U.S. incursion into Iran and its potential impact on global energy markets have pushed some investors toward safer bets. Troubles at Blue Owl Capital Inc. have also sparked concerns about private credit firms.

"We may be in a 'buy the rumor, sell the news' market environment, where the three-year bull run in AI and the 'Magnificent Seven' has driven expectations to euphoric levels," said Michael Bailey, Director of Research at Fulton Breakefield Broenniman, referring to the disconnect between strong earnings and market performance. "In other words, delivering 'beat-and-raise' results is now the baseline, not a cause for celebration."

Samir Samana, Global Head of Equities and Real Assets at Wells Fargo Investment Institute, noted that while earnings have been solid, uncertainties surrounding AI and private credit have "depressed" the valuation multiples investors are willing to pay for sectors like software and fintech. He added that this has led the S&P 500 to trade in a "sideways" pattern.

Although other sectors, including industrials and energy, have received higher valuations due to greater certainty and solid earnings, Samana pointed out that these areas do not carry significant weight in the index. Concerns about AI disruption materialized on Monday when a bearish report from Citrini Research, coupled with a warning from Nassim Taleb, triggered a burst of panic trading. IBM became a casualty of the sell-off, recording its largest single-day drop in over 25 years.

"Investors are worried about the future impact of AI, whether from capex pressures at hyperscale cloud providers or potential disruption to software firms and other industries," said Tom Hancock of GMO. "These concerns are not reflected in this quarter's earnings—and may not be this year—so there is some disconnect between stock returns and current fundamentals."

Uncertainty around tariffs is another factor investors must consider. The Supreme Court's rejection of former President Trump's sweeping global tariff plan was initially welcomed by market participants, but subsequent promises of new import duties have tempered that optimism.

Despite the multitude of factors traders must weigh, there remains confidence that U.S. corporate fundamentals will ultimately prevail. Traders may simply need to wait for clarity. "Investors need time to gauge the scope and pace of AI disruption," Samana explained. He added that investors will eventually come to share his view that economic conditions are "sound, with room for new highs ahead."

Bailey agreed, noting that under the right conditions, the S&P 500 could experience another impressive rally. "If companies can meet the robust consensus growth expectations for 2026, and market sentiment holds steady, we could see another impressive market performance, with the S&P 500 potentially rising 10% to 15% this year," Bailey said.