The S&P 500 Index retreated from a historic high on Monday as investors monitored developments in the Middle East and geared up for another busy earnings stretch after solid results helped drive the gauge higher the past five weeks.
The benchmark fell 0.4%, with 10 of 11 sectors in the red, led by materials and industrials. Only energy gained as oil climbed after the US and Iran exchanged fire in the Persian Gulf. The tech-heavy Nasdaq 100 Index dropped 0.2% as yields on 10-year Treasuries held near their highest levels of the day.
Stock gauges swung from small early gains after a report that a drone attack caused a fire in an oil industrial zone in the United Arab Emirates, as the flareup in violence cast doubt on the fate of a four-week ceasefire. Last week, strong earnings from tech mega caps helped push the benchmark S&P 500 to records.
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"We are in a market that is being carried by the earnings power of a small group of genuinely exceptional companies, lubricated by record buybacks and professional money that knows how to navigate chaos," Mark Malek, chief investment officer at Muriel Siebert & Co., wrote in a Monday note.
Malek flagged a tough backdrop, with unresolved tension in the strait along with slowing growth, re-accelerating inflation and the Federal Reserve likely being on hold for the time being with a new chair about to take over.
Investors shouldn't "confuse a narrow rally at all-time highs with a broad green light outcome," he said.
Earlier in the session, futures had wavered between gains and losses on a report of Iranian missiles hitting a US naval ship, which the US denied. A report of an explosion and fire on a South Korean vessel in the vital Strait of Hormuz, which remains essentially shut, also added to the tension.
Data assessing stocks' performance trends and the US business cycle "implies that current valuations are fair," RSM Chief Economist Joseph Brusuelas said. The S&P 500 "can hold near record levels due to outperformance in corporate earnings," which in turn offers a tailwind to the economy and overall financial conditions, he said. Brusuelas highlighted the tech sector in particular.
Top gainers on Monday included eBay Inc., which added 5.1% after a $56 billion cash and stock offer from GameStop Corp. Palantir Technologies Inc., which is expected to post a 74% increase in revenue year-over-over when it reports after the bell, rose 1.4%.
Meantime, earnings season has delivered better-than-expected results, with the proportion of companies missing analysts' estimates hovering at the lowest level since 2021.
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"Well into the Q1 season, despite a very high bar, earnings are coming in well above consensus estimates on every metric: in size and breadth; and across earnings, sales and margins," said Binky Chadha, chief US equity and global strategist at Deutsche Bank. "Indeed, earnings growth for the S&P 500 is on track to accelerate sharply from 13.4% in Q4 to 24.6% in Q1, the highest in at least four years."
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