It seems like every week the US financial markets are gripped by another bout of fear.
The latest concerns spread from the US banking sector this week after two regional lenders… warned that they would suffer losses from alleged fraud.
But before that, markets swooned on signs of renewed tensions between the US and China as the two superpowers clashed over tariffs, advanced technology and access to rare earth elements.
The bankruptcies of auto parts supplier First Brands and subprime auto lender Tricolor sparked nervous conversations in September.
U.S. stocks, which had been rising since the tariff-fuelled crash in April, have fallen over the past month.
But in many ways, the market's swings so far (the steepest decline of about 3%) are not unusual.
Zooming out, the major indexes are still up year-to-date, with the S&P 500 up about 13%. This is less than in 2024, but still stable.
“The market has performed surprisingly well this year … driven by rising corporate earnings and enthusiasm for artificial intelligence,” says Sam Stovall, chief investment strategist at CFRA Research.
Ironically, it is the resilience of the stock market that is causing some of the unrest.
Simply put, compared to other standard metrics such as earnings, US stock prices are very high.
Meanwhile, concerns about a possible bubble in the artificial intelligence (AI) industry have sparked a steady undercurrent of talk since the start of the year – discussions that are gaining momentum as analysts struggle to understand how the massive amounts of money the biggest players are throwing at each other fit together.
The Bank of England recently warned of “stretched valuations” and the growing risk of a “sharp market correction.”
Those concerns were addressed in comments from JP Morgan Chase chief Jamie Dimon and, to some extent, US central bank chairman Jerome Powell.
The last to speak this week was the International Monetary Fund.
“Markets appear complacent as the situation turns,” the financial stability report said, noting risks from trade tensions, geopolitical uncertainty and rising sovereign debt.
James Reilly, senior markets economist at Capital Economics, said the market decline driven by regional banks is a sign that investors are wary of risk and are moving quickly to reduce risk amid uncertainty over whether the losses are indicative of broader problems.
But he said the short duration of those drops showed how quickly such concerns could dissipate.
Many investors remain optimistic, and analysts at companies such as Goldman Sachs and Wells Fargo have in recent weeks raised their forecasts for where the S&P 500 could rise by the end of the year.
David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, said he believes a sharp selloff is unlikely at a time when U.S. economic growth remains robust and the U.S. central bank is cutting borrowing costs.
He expects the S&P 500 to end the year at 6,900, up about 4% from Friday.
While he acknowledged the problems at banks, he noted that the lenders involved are alleging fraud.
He said the overall picture looks good when looking at default levels, and he doesn't see any risk of demand for AI suddenly dropping, leading to lower valuations.
“I'm not saying we're in a bubble. I'm not saying we're not in a bubble. The question is what will drive the decline,” he said. “Businesses don’t usually go downhill spontaneously.”
A typical bull market, when stocks rise, lasts about four and a half years, Mr. Stovall said.
With inflation remaining stubborn and investors wary of events in Washington such as the government shutdown and the Trump administration's attempts to influence the US central bank, the market's rally this year has been “unloved”, Mr Stovall said.
On the other hand, he noted: “It’s just a matter of time. Corrections and bear markets have not been canceled. They may simply be postponed.”
