Great Expectations. Third quarter earnings kicked off in earnest Tuesday, and hopes are high. That means good news may not be good enough, and we found out today that this market is looking for nits to pick.

JPMorgan Chase, Wells Fargo and Citigroup all posted solid results, but their stocks still took a hit. JPMorgan Chase ended the day down about 1%. Wells Fargo and Citigroup fell 3% and 5.6% respectively. Shares of Goldman Sachs, which also reported today, stayed relatively flat.

Those losses contributed to weakness in major market indexes. The Dow Jones Industrial Average, which includes Goldman and Chase as two if its 30 components, was down nearly 0.4% on Tuesday. The S&P 500 ended the day essentially flat. And the Nasdaq Composite fell almost 0.2%.

There was another factor weighing on the market. Healthcare giant Johnson & Johnson, also a Dow component, tumbled nearly 6% after reporting its earnings. Even though the headline numbers topped forecasts and J&J boosted its outlook, investors focused on a slowdown in the company’s medical tech division. J&J’s woes overshadowed better-than-expected results from insurer UnitedHealth, which is a Dow member as well. UnitedHealth’s stock dipped 0.2%.

The good news is that banks reporting today emphasized that general consumer credit quality remains relatively healthy. “The backdrop for earnings growth at these major companies is good. We have nominal growth, low unemployment, healthy credit and a strong wealth effect,” writes Macrae Sykes, portfolio manager for the Gabelli Financial Services Opportunities ETF.

So investors take heart: The big banks might have had a down day, but they don’t seem too nervous abut the larger macro forces at play.

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The Hot Stock: CDW +5.7%
The Biggest Loser: Applied Materials -6.7%

Best Sector: Energy +1.7%
Worst Sector: Health Care -1.3%

One could argue that the market’s collective shrug after decent big bank earnings is a troublesome sign. What more could investors be asking for?

But the less-than-euphoric reaction to those reports may actually be a blessing in disguise, according to Mark Zagata, a portfolio manager with Parnassus Investments.

“Skepticism is a good thing,” he tells Barron’s, especially since valuations have fallen in recent months. It means that more stocks are bargains, even among momentum-oriented sectors like tech.

Zagata’s firm owns Amazon, Alphabet and Microsoft. He thinks that these hyperscalers are poised to continue benefiting from solid earnings growth, and argues that the health of the core businesses will help fund more spending on AI investments.

He added that he’s finding good values among banks and healthcare. Parnassus owns JPMorgan Chase and Citigroup as well as medical equipment manufacturer Stryker and European drug giant AstraZeneca.

With so many investors seemingly focusing on either growth or value, a mix of the two styles is worth noting. And if he’s right, investors get the best of both worlds: more gains if the AI trade continues to flourish while also benefiting if the broadening market rally picks up steam.

ASML Holding, Bank of America, BlackRock, Fastenal, Morgan Stanley, Progressive, and State Street report earnings tomorrow.

The Bureau of Labor Statistics releases the consumer price index for September. Consensus estimate is for a 3.6% year-over-year increase, two-tenths of a percentage point more than in August. The core CPI, which strips out volatile food and energy prices, is expected to rise 2.5%, compared with 2.4% previously.

The Federal Reserve releases the beige book for the seventh of eight times this year. The report gathers anecdotal information on current economic conditions from the 12 regional Federal Reserve banks.

—Dan Lam

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