The Hidden Market Stress Obscured by Stock Indexes | Liz Ann Sonders

Why It Matters

The concealed drawdowns signal deeper market fragility that could surface during earnings season, making factor‑focused strategies and oil‑price monitoring essential for risk‑aware investors.

Key Takeaways

• Index-level drawdowns mask deeper, widespread stock-level losses across market.
• Average S&P stocks down 17% and Nasdaq stocks down 31%.
• Oil price shock fuels sector rotation and steep inverse market correlation.
• Earnings forecasts may shift once analysts confront sustained high oil.
• Factor‑based strategies outperform sector bets amid rising dispersion.

Summary

The conversation with Charles Schwab’s chief investment strategist Liz Ann Sonders centers on a hidden market stress that headline indexes are concealing. While the S&P 500 and Nasdaq have posted modest year‑to‑date drawdowns of 7% and 9% respectively, the average individual stock in those baskets has fallen far more—about 17% for the S&P and 31% for the Nasdaq—revealing a broad‑based churn beneath the surface.

Sonders attributes much of this divergence to the recent oil price shock triggered by geopolitical tension in the Strait of Hormuz. Higher crude has spurred a sharp rotation into energy stocks, which have outperformed by over 30%, while other sectors lag, creating a pronounced inverse correlation between oil prices and equity returns. The market’s resilience so far reflects delayed earnings adjustments; forward‑looking estimates remain upbeat, but analysts are expected to revise them as the earnings season approaches.

Key excerpts illustrate the dynamics: Sonders notes that “the fuller story is told under the surface of these cap‑weighted indexes,” and points to intraday data showing a steep negative correlation between Brent crude and the S&P 500. She also highlights that the best‑performing stocks this month have been those most heavily shorted, underscoring the role of factor‑based characteristics—short‑interest, value, momentum—in driving dispersion beyond traditional sector bets.

For investors, the takeaway is clear: relying on headline index moves can mask significant underlying risk. Monitoring sector rotation, oil‑driven inflation pressures, and factor signals will be crucial as earnings season unfolds and the Fed balances a weakening labor market against persistent price pressures. Adjusting portfolios toward resilient factors and staying vigilant on earnings revisions can help navigate the hidden volatility ahead.

Original Description

This episode is brought to you by the Pictet AI Enhanced International Equity ETF ($PQNT):

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In this episode of Monetary Matters, Liz Ann Sonders, Charles Schwab’s Chief Investment Strategist, explains how 2026 presents an "analytically rich" environment where headline indices are currently masking significant underlying market stress. She notes that while the S&P 500 shows a modest drawdown, the average stock is seeing much steeper declines, reflecting a period of intense "rotation and churn" triggered by the war in Iran and a spike in oil prices. Sonders highlights a critical shift in investor behavior, where the previous year's preference for non-profitable speculative stocks has flip-flopped in favor of a "quality" factor centered on stable profitability and strong balance sheets. She draws parallels to the 1990 period, warning that the lack of alternate routes for oil through the Strait of Hormuz could lead to sustained economic demand destruction. Despite these geopolitical shocks, Sonders observes that forward earnings estimates for the tech and energy sectors remain surprisingly resilient, though she anticipates downward revisions as reporting season approaches. Ultimately, she reminds investors that in such a volatile cycle, "better or worse" as a leading indicator often matters more to the market than whether the data is objectively "good or bad". Recorded March 24, 2026.

Pieces referenced:

“Dire Strait: War's Impact on Stocks”: https://www.schwab.com/learn/story/dire-strait-wars-impact-on-stocks

“Schwab Market Perspective”:

https://www.schwab.com/learn/story/stock-market-outlook

“Smoke on the Water…Fire Under the Surface”: https://www.schwab.com/learn/story/smoke-on-waterfire-under-surface

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Timestamps

00:00 Intro

00:28 $PQNT $PQUS Preroll

01:00 "Obscured Stress" In The Market

10:00 Oil Is Trading Inversely With Stocks

16:23 Unprofitable Stocks Are Underperforming

21:48 The Quality Factor

28:21 $PQNT $PQUS Midroll

30:10 Mag7 & Other MegaCaps

35:10 Earnings Expectations Still Are Great

47:01 Oil Concerns

51:20 Private Credit

1:01:00 Foreign Markets vs. U.S. Stocks

1:08:27 $PQNT $PQUS Endroll

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