It was a topsy-turvy week for Wall Street, though the three major averages managed to post solid gains.There was ongoing trade tensions between the U.S. and China, a government shutdown that shows no sign of ending, the start of the third quarter earnings season, and a scare over the health of regional banks.
The focus on Tuesday and Wednesday shifted to quarterly results from major banks – JPMorgan, Goldman Sachs, Wells Fargo, Citi, Bank of America, and Morgan Stanley, all of whom expressed positive sentiment driving their outlook into Q4 2025. But, all was not well with regional banks. US regional banking stocks fell sharply on Thursday after two banks disclosed issues with bad and fraudulent loans, amplifying concerns on Wall Street around the state of credit markets. Zions Bancorp announced it had a $50m charge-off over two bad loans from its subsidiary, California Bank & Trust in San Diego. Western Alliance also said it was dealing with a fraudulent borrower.
Despite that, for the week, the S&P gained 1.7%, while the Dow added 1.6%. The Nasdaq advanced 2.1%.
Future Wealth’s View
We tend to believe that a strong stock market is a reflection of a strong economy. But, that is not always the case. The stock market has been sending a message of strong growth. The technology stocks have continued to move up while defensive stocks have been going nowhere fast. But, markets don’t sell off because valuations are elevated. Markets sell off because earnings expectations fall. Thus far, earnings from US companies have been inline or better than Wall Street expectations.
We only have to look at the performance of Warren Buffett’s Berkshire Hathaway to understand where the stock market stands. Berkshire Hathaway’s YTD returns is 8.6% vs the S&P 500’s return of 13.3%. The main reason for the underperformance may lie in the Buffett Indicator – US total market capitalization divided by US GDP is now sitting at an all time high. Buffett has stated that 100% indicates that a country’s stock market is fairly valued relative to its economic output. Current reading of the Buffett indicator sits at 217%. It is safe to say that Warren Buffett is not taking any big risks in his portfolio of companies at Berkshire Hathaway.
That brings us back to earnings – if big company earnings disappoint in the next few weeks, we may be in for some rough correction in the stock market.