Every week it seems like U.S. financial markets are hit with a new bout of fear.
The latest concerns spread across the US banking sector this week, after two regional lenders warned they would be hit by losses from suspected fraud.
But before that, markets had been fading over signs of renewed tensions between the United States and China, as the two superpowers clashed over tariffs, advanced technologies and access to rare earths.
The bankruptcies of auto parts supplier First Brands and subprime auto lender Tricolor sparked nervous discussions in September.
Over the past month, U.S. stocks, which had been rising since their tariff-induced rout in April, have flattened.
But in many ways, the market’s swings so far — down about 3% at their peak — are not unusual.
Zooming out, the major indexes are still showing year-to-date gains, with the S&P 500 up about 13%. It’s smaller than 2024 but still solid.
“The market has performed surprisingly well so far this year… driven by improving corporate earnings and enthusiasm for AI,” says Sam Stovall, chief investment strategist at CFRA Research.
Ironically, it is precisely the resilience of the stock market that is causing this nervousness.
Simply put, compared to other standard indicators like profits, stock prices in the United States are very high.
Meanwhile, concerns about the emergence of a bubble in the artificial intelligence (AI) sector have generated a steady undercurrent of discussion since the start of the year – discussions that have intensified as analysts struggle to see how the huge sums of money the biggest players are throwing at each other fit together.
The Bank of England recently warned of “strained valuations” and a growing risk of a “sharp market correction”.
These concerns were echoed in remarks by JP Morgan Chase boss Jamie Dimon and, to some extent, US central bank president Jerome Powell.
The International Monetary Fund was the latest to weigh in this week.
“Markets appear to be complacent as things move forward,” says the financial stability report, which highlights risks from trade tensions, geopolitical uncertainty and growing sovereign debt.
James Reilley, senior markets economist at Capital Economics, said the market falls triggered by regional banks were a sign that investors were paying attention to risk and acting quickly to reduce their exposure amid uncertainty over whether the losses were indicative of wider problems.
But he said the brevity of the declines showed how quickly such concerns could dissipate.
Many investors remain optimistic, with analysts at firms including Goldman Sachs and Wells Fargo revising upwards in recent weeks their forecasts for how much 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 thought a sharp selloff was unlikely at a time when U.S. growth remains strong and the U.S. central bank is cutting borrowing costs.
He expects the S&P 500 to finish the year around 6,900 points, about 4% higher than Friday’s level.
While acknowledging the problems arising at the banks, he noted that the lenders involved have alleged fraud.
He said the overall picture, looking at default levels, looks healthy and he sees little risk that demand for AI would suddenly decline, which would disrupt valuations.
“I’m not saying we’re in a bubble. I’m not saying we’re not in a bubble. The question is what’s going to drive the decline,” he said. “Things don’t usually decline spontaneously.”
A typical bull market — when stocks are rising — lasts about four and a half years, Mr. Stovall said.
While inflation remains persistent and investors are wary of events in Washington, such as the government shutdown and the Trump administration’s efforts to influence the U.S. central bank, this year’s market rally has been “unwelcome,” Mr. Stovall said.
On the other hand, he noted: “It’s only a matter of time. Corrections and bear markets have not been repealed. They might just be delayed.”
