Ned Davis Research Warns of Contingent Selling Risk Amid Potentially Disappointing Q4 Earnings Season

This analysis is based on Tim Hayes’ appearance on CNBC’s “Closing Bell Overtime” [1] on January 23, 2026, where the Chief Global Investment Strategist at Ned Davis Research (NDR) warned that “disappointing earnings season could drive contingent selling.” Hayes, a 45-year veteran strategist, discussed his firm’s weight-of-the-evidence framework for market analysis, highlighting concerns about algorithm-driven selling triggers, elevated market valuations, and mega-cap concentration risk. The S&P 500 and NASDAQ trade near all-time highs [0], creating an asymmetric risk profile where earnings misses may be disproportionately punished given the forward P/E ratio of 22.2x—significantly above 5-year and 10-year historical averages [4].

The U.S. equity markets are demonstrating notable divergence as of January 23, 2026, with large-cap indices maintaining their near-record levels while smaller-capitalization stocks experience pronounced weakness [0]. The S&P 500 closed at 6,915.62, posting a modest 0.11% gain, while the NASDAQ Composite advanced 0.26% to 23,501.24, reflecting continued technology sector momentum [0]. In contrast, the Dow Jones Industrial Average slipped 0.34% to 49,098.72, and the Russell 2000 small-cap index declined sharply by 1.61% to 2,669.16, signaling elevated volatility in this market segment [0].

Sector rotation patterns reveal a defensive posture emerging among investors [0]. Basic Materials (+1.73%) led all sectors, followed by Communication Services (+1.07%), likely buoyed by artificial intelligence-related developments, Consumer Defensive (+0.82%), and Technology (+0.78%) [0]. Conversely, Financial Services (-1.65%) emerged as the weakest performer, raising questions about whether this weakness could spread to other market segments [0]. The concentration of market gains in mega-cap technology names has created structural vulnerability, as the market’s advance becomes increasingly dependent on a limited number of large-capitalization stocks performing in line with elevated expectations [3].

The Q4 2025 earnings season presents a mixed fundamental picture according to FactSet analysis [4]. Projected year-over-year earnings growth stands at 8.3%, which would mark the 10th consecutive quarter of earnings growth for the S&P 500 [4]. Revenue growth projections of 7.7% would extend the streak to 21 consecutive quarters of revenue expansion [4]. These figures suggest continued corporate profitability, though the sustainability of this growth trajectory remains contingent upon actual reported results matching or exceeding analyst expectations.

Several factors complicate the constructive earnings outlook [4]. The positive guidance rate of 47% exceeds both the 5-year average (42%) and 10-year average (40%), which could indicate overly optimistic corporate outlooks that may be revised downward during reporting season [4]. More significantly, earnings optimism appears heavily concentrated in the Information Technology sector, while Consumer Discretionary is expected to post year-over-year declines [4]. The Energy sector alone is projected to experience declining revenue year-over-year, creating a headwind for the broader index [4].

Historical patterns suggest potential for earnings estimate revisions that could surprise to the downside [4]. Over the past 20 quarters, analysts have typically lowered earnings estimates during a reporting quarter by an average of 1.6% [4]. However, Q4 2025 has seen a 0.5% increase in estimates—an atypical pattern that may reverse as actual reporting commences [4]. This phenomenon raises the possibility that current consensus expectations may prove optimistic relative to realized results.

Tim Hayes and Ned Davis Research employ a comprehensive 360° weight-of-the-evidence approach that integrates multiple analytical dimensions [3]. This framework combines price momentum indicators, market breadth analysis, sentiment measurements, macroeconomic factors, and valuation metrics to construct a holistic view of market conditions [3]. Rather than relying on any single indicator, NDR’s methodology seeks to identify confluence among various signals to improve the probability of directional accuracy.

Hayes characterizes the current market environment as a “secular bull with rising secular-bear risks” [3]. This nuanced classification reflects the view that longer-term structural bullish trends remain intact, but intermediate-term risk factors have increased to levels warranting heightened vigilance [3]. The distinction between secular and cyclical market phases is crucial for positioning decisions, as secular trends typically span multiple years and are characterized by structural rather than temporary fundamental drivers.

The concept of “thrust” signals plays a central role in NDR’s market assessment methodology [3]. These breadth thrusts occur when market advances are confirmed by broad participation across individual securities, rather than being concentrated in a narrow cohort of market leaders [3]. The quality of market rallies differs substantially depending on whether breadth confirms price movements or whether gains represent “dead-cat bounces” that lack sustainable foundation [3].

Hayes’ warning about “contingent selling” represents one of the most significant risk factors identified in the current market environment [1]. This term refers to automated or algorithm-driven selling mechanisms that can trigger when predefined conditions are met [2]. As systematic trading strategies have proliferated across the investment industry, the potential for coordinated selling pressure in response to earnings disappointments has increased substantially [3].

The mechanics of contingent selling involve portfolio hedging strategies, option-related hedging activities, and systematic risk-parity approaches that can amplify market moves in either direction [3]. When earnings disappointments occur, these automated systems may simultaneously trigger selling activity across multiple strategies, creating cascade effects that exceed what fundamental developments alone might justify [3]. The concentration of market gains in mega-cap technology names heightens this risk, as disappointments among a limited number of highly weighted stocks could trigger widespread algorithmic responses [3].

Understanding the positioning of systematic trading strategies is challenging because the extent of contingent selling reserves is not publicly quantifiable [3]. Market participants must therefore exercise caution in assessing downside risks, as opacity regarding systematic positioning can mask the true magnitude of potential selling pressure [3]. This information asymmetry creates challenges for risk management even when fundamental analysis suggests elevated valuation concerns.

The elevated forward P/E ratio of 22.2x significantly exceeds both the 5-year average (20.0x) and 10-year average (18.7x), creating a demanding baseline for market performance [4]. At these valuation levels, the market effectively prices in sustained earnings growth that must be realized to justify current price levels [4]. Any meaningful shortfall between actual earnings and consensus expectations may result in disproportionate price declines as investors recalibrate valuations downward [4].

The projected earnings growth rates for subsequent quarters—12.6% for Q1 2026 and 14.6% for Q2 2026—represent ambitious targets that depend on execution across multiple sectors [4]. The narrowness of earnings growth concentration in Information Technology, combined with expected declines in Consumer Discretionary and Energy, creates execution risk that could pressure valuations if sector breadth fails to expand [4]. The magnification of mega-cap tech influence on index performance means that developments affecting a limited number of companies can have outsized market impact [5].

Recent evidence suggests that the “Magnificent 7” mega-cap technology stocks have lagged behind smaller companies in Q4 earnings performance [5]. This development contradicts the narrative that mega-cap tech leadership remains firmly intact and raises questions about the sustainability of concentrated market gains [5]. If smaller companies are outperforming mega-caps in earnings delivery, the market’s dependence on a limited number of leaders for overall index performance creates structural vulnerability [5].

The Russell 2000’s 1.61% decline on January 23, 2026, reflects elevated small-cap volatility that may precede broader market weakness [0]. Small-capitalization stocks historically serve as leading indicators for economic activity, and their current weakness could signal concerns about economic growth that have not yet been fully reflected in large-cap indices [3]. The divergence between small-cap and large-cap performance warrants monitoring as a potential early warning signal.

The earnings season introduces several distinct risk dimensions that market participants should carefully evaluate [1]. The primary risk involves earnings disappointments triggering contingent selling cascades, which could amplify downside moves beyond what fundamental developments would traditionally produce [3]. This risk is particularly elevated given the concentration of market gains in mega-cap technology names and the elevated valuation multiples that require sustained earnings growth [4].

Interest rate sensitivity represents a secondary risk factor, as the correlation between bonds and equities has shifted since 2022 in ways that may affect traditional diversification benefits [3]. The Federal Reserve’s policy stance continues to influence market liquidity conditions, and any unexpected shifts in monetary policy could interact with earnings-related pressures to create amplified market reactions [6].

The weakness observed in Financial Services (-1.65% on January 23) may indicate spreading concerns about sector performance that could extend to other market segments [0]. Financial sector performance traditionally correlates with economic growth expectations, and current weakness may reflect concerns about credit conditions or economic momentum that have not yet been fully articulated in equity valuations [0].

Despite the risk factors identified, several considerations provide context for a balanced assessment [4]. The projected 8.3% year-over-year earnings growth would represent meaningful progress, and if realized, would support the constructive secular bull case that NDR continues to acknowledge [4]. The defensive sector rotation observed on January 23 (Consumer Defensive +0.82%, Basic Materials +1.73%) may reflect prudent risk management rather than outright bearish positioning [0].

The weight-of-the-evidence framework employed by Ned Davis Research has historically provided useful signals during transitional market periods [3]. While Hayes identifies rising secular-bear risks, the persistence of secular bull characteristics suggests that structural support for equity prices may remain intact even if short-term volatility increases [3]. Market participants utilizing disciplined frameworks may be better positioned to navigate the earnings season without overreacting to individual reporting period developments.

The analysis presents a nuanced market picture where near-record index levels coexist with meaningful risk factors [0]. Tim Hayes’ warning about contingent selling during a potentially disappointing earnings season represents a notable contrarian perspective at a time when major indices trade near all-time highs [1]. The warning is grounded in historical patterns of earnings estimate revisions, concentration risk in mega-cap technology leadership, elevated valuations requiring sustained earnings growth, and the potential for systematic trading to amplify downside moves [3].

Key metrics to monitor during the earnings season include early Q4 reports from major companies, breadth indicators and advance-decline ratios, sector rotation patterns particularly in defensive sectors, and potential forward P/E compression if earnings estimates decline [4]. The consensus view remains constructive on earnings growth at 8.3% year-over-year, but Hayes’ caution about contingent selling highlights the asymmetric risk profile at current valuation levels [1][4].

Market participants should recognize that the concentration of market gains in mega-cap technology names creates vulnerability if these leaders disappoint [3]. The forward P/E of 22.2x significantly exceeds historical averages, meaning that earnings must meet or exceed expectations to justify current multiples [4]. The extent of algorithm-driven selling reserves in the market remains unknown, introducing uncertainty that cannot be fully quantified through traditional analysis [3].

[0] Ginlix Analytical Database – Market indices and sector performance data

[1] CNBC Television – “Disappointing earnings season could drive contingent selling, says Ned Davis’ Tim Hayes” (Closing Bell Overtime, January 23, 2026)

[2] CNBC Television – “The Week Ahead: January 23, 2026”

[3] Excess Returns/YouTube – “Bull Market on Borrowed Time | What Ned Davis Research’s Proven 45-Year System Says Now”

[4] FactSet Insight – “S&P 500 Earnings Season Preview: Q4 2025”

[5] Forbes – “Q4 2025 Earnings: S&P 500 Beats, Magnificent 7 Lags, Small Caps Pop”

[6] State Street Global Advisors – “Mind on the Market - January 23, 2026”