Despite the hot GDP numbers, the stock market was unable to maintain its rally

The S&P 500 has tried hard to rally, just as it has done so many times over the past few months, but those rallies almost always fail. Some of these small spikes from the summer continued for weeks, ending at lower levels than the previous level, a theme that repeated itself again. This continued selling indicates a decline in market confidence in the economy, in profits, and in the real value of stocks.

“Sentiment has changed,” says Jay Woods, chief global strategist at Freedom Capital Markets. “Things are starting to show malfunctions. That gives me pause.”

Especially since good news is now bad news again. The US economy grew at a rate of 4.9% in the third quarter before inflation, which seems to be a glowing number. Unfortunately, this reaffirms the Fed’s determination to keep interest rates high in order to cool the economy and inflation. Although interest rates are not expected to rise, investors will be watching for any clues about how long they will remain high when the central bank meets on Tuesday and Wednesday.

And for good reason. The longer rates persist, the more economic and earnings growth slows, as tightening policy hits the economy with a delay. This makes investors and companies doubt even the good news coming from corporate earnings. Meta Platforms (ticker: META) warned on its third-quarter earnings call that ad sales may slow even as its earnings and sales easily beat expectations, causing the stock to decline 3.7%.

Meta is not alone. S&P 500 companies that beat third-quarter sales and profit estimates posted gains of just 0.5% after reports, according to Evercore ISI, half the five-year average of 1%. These modest market reactions to earnings reflect a market that remains expensive.

The S&P 500 is trading at about 17 times expected earnings per share over the next 12 months. This is high, considering that higher yields make future earnings less valuable, which should impact valuation multiples. Historically, the S&P 500 multiple should fall somewhere at low levels when the 10-year yield, at 4.84%, is as high as it is now, according to Evercore.

“Yield, at least in the short term, is stuck here,” says Steve Sosnick, chief strategist at Interactive Brokers.

Investors have to hope stocks are stuck, too. While they are unlikely to make new highs, that is better than making new lows.

Write to Jacob Sonenshine at [email protected]