S&P 500’s road to 8,000 grows tougher as yields rise, AI doubts mount; all eyes on quarterly earnings

Reuters

Renewed concerns about the artificial-intelligence boom further raised the risk of disappointment in S&P 500 stocks.

Since the previous earnings season began in July, oil prices have climbed above $105 a barrel from about $84, while the 10-year US Treasury yield reached its highest level since 2002. Higher oil prices and bond yields typically weigh on equities, while November’s midterm elections added another layer of uncertainty.

Renewed concerns about the artificial-intelligence boom, the year’s dominant force in markets and the economy, further raised the risk of disappointment.

“Good is not going to be enough. You’re going to have to see very, very strong results,” Julien Lafargue, chief market strategist at Barclays Private Bank, told Reuters.

He added that investors could decide to take profits, wait for the midterm-election results and then reassess their portfolio exposure.

Market response to chip stocks' earnings muted

The market’s muted response to Samsung Electronics’ strong results offered an early indication that expectations had risen significantly.

The memory-chip maker projected more than $80 billion in quarterly operating profit, which would have been a record for a technology company, but investors were unimpressed. Its shares remained nearly 40% below their June peak despite having almost doubled during the year.

TSMC, the world’s largest manufacturer of advanced chips, also struck a cautious tone on 2027 because of macroeconomic uncertainty. The warning tempered an otherwise positive outlook after the company posted a sixth consecutive record quarterly profit, supported by strong AI-related demand.

The Philadelphia Semiconductor Index had declined in every session since Samsung released its results. A lacklustre start to the US earnings season, led by banks, had added to market concerns.

Banks’ exposure to AI financing also left them vulnerable to any deterioration in sentiment towards the sector. A pullback in investment could have raised questions about borrowers’ credit quality and exposed lenders to potential losses.

The caution had already begun to influence portfolio positioning. RBC Capital Markets reduced its allocation to US technology stocks to “market weight” and shifted towards healthcare. Citigroup withdrew its “overweight” rating on US equities after its indicators reached levels historically associated with market peaks. The S&P 500 had gained 13% during the year.

A tale of two markets

S&P 500 earnings were expected to increase 30.6% year on year in the third quarter, according to Tajinder Dhillon, head of earnings and equity research at LSEG. However, much of that growth depended on a small group of companies.

Excluding the “Magnificent Seven” and companies in the technology and energy sectors, earnings for the rest of the S&P 500 were expected to rise just 5% from a year earlier, down from 14% growth in the previous quarter, according to HSBC.

The same megacap and AI-related stocks that had driven the benchmark to record highs had also left it vulnerable to any disappointment. A weak report from one market leader could have had a greater effect on the index than strong results from dozens of smaller companies.

“When you peel back the layers, it’s like a tale of two markets,” said Alan Ebright, senior investment officer at Check Capital Management.

The divide was also visible in market breadth. Although the S&P 500 remained near record highs, 62% of its constituents traded below their 50-day moving averages, according to a Reuters analysis of LSEG data.

“Megacaps have helped the S&P 500 maintain an illusion of calm on the surface,” said Kevin Gordon, head of macro research and strategy at the Schwab Centre for Financial Research.

Higher yields had also hurt rate-sensitive sectors. Housing stocks, utilities and dividend-paying companies lagged as US Treasuries offered investors attractive returns without the risks associated with equities.

Not all strategists had turned cautious. Some argued that the economic expansion and bull market still had room to continue, despite the challenge posed by higher borrowing costs.

“Economic expansions and the bull markets riding on them do not expire on a set schedule,” said Jeffrey Schulze, head of economic and market strategy at Franklin Templeton.