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On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Consulting Director Sophie Antal Gilbert discussed the ongoing volatility in markets, the U.S. GDP growth rate for the third quarter and the European Central Bank (ECB)’s plans for ending quantitative easing.

Market slump continues. Is earnings season to blame?

Global markets were battered the week of Oct. 22, Eitelman said, with the S&P 500® Index posting a weekly decline of roughly 4.5% as of midday Oct. 26, while the MSCI Emerging Markets Index and the Euro STOXX 600® Index both finished the week off roughly 3.5%. The U.S., in particular, has taken the brunt of the current market downturn, Eitelman noted, with the S&P 500 briefly dipping into correction territory the morning of Oct. 26—down approximately 10% from its all-time high on Sept. 20.

What’s behind the market slump? “In our view, it boils down to third-quarter earnings season, especially in the U.S.”, Eitelman stated. First off, while many companies are still beating expectations—overall earnings growth is roughly 23% so far, he noted—the number is a step down from the first and second quarters of 2018 when U.S. large-cap companies logged growth rates of approximately 25%. Secondly, the market appears to be latching on to disappointing news at the micro level from some company management teams, Eitelman said. “Amazon, for instance, reported revenue guidance for its critically important fourth-quarter holiday shopping season that was 5% below consensus expectations—and this resulted in a big headwind for the company’s forward-looking outlook,” he explained.

Eitelman is also seeing some anecdotal evidence that costs are starting to ramp up for U.S. businesses. “This presents a real question mark on the sustainability of profit margins for U.S. companies, which are currently at record levels,” he noted. All things considered, though, Eitelman stressed that, in his opinion, the current backdrop does not point to the start of a bear market. “Ultimately, the downturn in markets is likely being caused by earnings expectations that were a little bit too high and a little bit too optimistic,” he said, adding that he views the step down in sentiment as a healthy adjustment.