By Jacob Sonenshine

Markets ended the week on a positive note, but don't be fooled: Jitters are emerging below the surface, setting up a potentially rocky path for the rest of 2025 and next year.

Yes, the S&P 500 index, Nasdaq Composite, and Dow Jones Industrial Average were on track to gain 0.5%, 1.9%, and 0.5%, respectively. But volatility picked up, and some big-name stocks got punished as investors questioned their earnings reports.

Tech came close to spoiling the party as the industry signaled much more spending on artificial intelligence. Meta Platforms' margins dropped in the third quarter as it aggressively ramped up outlays, including on AI, sending its stock down 11% after reporting earnings. Microsoft also announced hefty capital investment plans for AI, pressuring its stock despite strong quarterly results.

Amazon.com was a standout, bucking the downturn after beating estimates across all segments. Apple, spending less on AI, also soothed nerves with better-than-expected earnings and an aggressive growth forecast for the fourth quarter.

A slowdown in AI-related spending will come, but the big spenders -- Meta, Amazon, Microsoft, Alphabet, and Oracle -- say they're still planning double-digit percentage increases in the near term. They'll report their fourth quarters in late January and early February, providing a reprieve about bubble concerns at least until then.

If there is trouble ahead, it's "probably more quarters than months" away, says AllianceBernstein economist Eric Winograd.

Tech companies aren't the only ones spooking the market. Chipotle Mexican Grill dropped 18% after cutting its full-year forecast for same-store sales. Also hit hard were health insurer Cigna and financial-technology company Fiserv, the latter losing more than 40% of its market value after issuing a drastically reduced outlook.

Part of the problem may simply be market fatigue after a stellar bull run. Steep expectations for earnings beats create a setup for disappointment if companies fall even slightly short.

Even good deeds aren't going unpunished: Consumer discretionary companies' earnings have beaten expectations by 14% on average, but their stocks still dropped 2% the trading day after reporting, according to Evercore ISI. Energy is similarly under pressure, down 2% in October even though companies beat earnings estimates by 11% on average, according to Fundstrat.

Another pressing risk is the Federal Reserve's plans for interest rate cuts. The rate of inflation, at around 3%, remains above the Fed's target. Chair Jerome Powell indicated in his Wednesday news conference that a December cut isn't a shoo-in, partly because of a lack of economic data during the government shutdown.

Powell emphasized that the Fed will operate cautiously. But the market would almost certainly slump if the Fed doesn't cut in December, leaving rates higher than expected next year and putting the economy at greater risk of a recession.

"If we start seeing layoffs throughout the economy, that will signal a recession is possible, maybe even probable," says Winograd.

Expect modest gains for the rest of the year -- or a selloff if the Fed doesn't come through in December. The S&P 500 is trading 13% above its 200-day moving average, a technical sign that it's overextended. The market traded 9% above that average in early 2022 when it peaked -- and then dropped 25% -- as the Fed surprised the market with rate hikes.

"The market is entirely too complacent about downside risks," writes Jonathan Krinsky, chief market technician at BTIG.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 31, 2025 13:38 ET (17:38 GMT)

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