Global markets have recently faced multiple tests: the United States attempting to strengthen its control over Greenland, political uncertainty in Japan impacting global bond markets, and the Federal Reserve’s independence also being called into question. Against this backdrop, U.S. stocks recorded their largest single-day drop since October on Tuesday, with the S&P 500 index falling 2.1%, erasing all its gains for the year. However, Wall Street strategists point out that despite increased short-term volatility, the foundation for medium to long-term stock market growth remains solid.
Strategists generally believe that risk assets have historically been able to absorb geopolitical turbulence unless such events trigger sharp increases in oil prices. Alastair Pinder, Head of Emerging Markets and Equity Strategy at HSBC Holdings, notes that among the 36 major geopolitical events since 1940, U.S. stocks have risen 60% of the time in the subsequent three months. He emphasizes, “The primary exceptions occurred when geopolitics drove significant spikes in oil prices.” Although crude oil prices rose on Tuesday, both Brent and WTI prices remain below their long-term averages, mitigating their impact on the stock market.
Corporate earnings have become the core pillar of the bullish outlook. Fourth-quarter profit growth is projected to be around 9%, with double-digit growth expected in each quarter of 2026. The artificial intelligence theme continues to fuel tech-heavy stocks, while investor interest is spreading to broader sectors such as healthcare, resources, and consumer goods. Market breadth has improved significantly: approximately 70% of S&P 500 constituents are holding above their 200-day moving averages, and both the Russell 2000 and S&P Equal Weight indices have reached record highs. Chris Verrone of Strategas Asset Management LLC points out that the current market backdrop does not align with the characteristics of a major top, and the long-term trend remains upward.
Market sentiment has risen to elevated levels, with the American Association of Individual Investors (AAII) bullish-bearish ratio reaching its peak for 2024, and fund managers’ stock allocations nearing 96%. The Volatility Index (VIX) has jumped above 20, though not yet at panic levels, it is the highest since last November. Short-term disruptive factors include the threat of U.S. tariffs on Europe and the ripple effects triggered by the sharp decline in Japanese government bonds, both of which have intensified market correction pressures.
Earnings performance has temporarily offset external uncertainties. According to data from BofA Securities, among S&P 500 index companies that have reported results, 73% exceeded expectations, higher than the historical average for the same period. Dan Greenhaus of Solus Alternative Asset Management LP believes, “If the earnings season remains strong, other disruptive factors will take a back seat.” Additionally, tax-cut policies and real wage growth are expected to boost the economy, while slowing inflation also bodes well for the stock market.
Despite facing adjustment pressures from geopolitical conflicts, policy uncertainty, and elevated sentiment, corporate earnings and economic fundamentals continue to provide support for U.S. stocks. Strategists generally believe that, provided the earnings season validates profit prospects and oil prices do not spiral out of control, the medium to long-term trend of the stock market remains positive.
