Goldman Sachs (GS) just reported quarterly earnings that beat Wall Street’s estimates by 32%.

Heading into the report, the stock had fallen about 20% in the three months.

That’s usually a promising setup for a relief rally. After a stock has already sold off, strong earnings can give investors a reason to start buying again.

Instead, Goldman delivered the second-highest quarterly revenue in its history… and the stock still fell about 2% the next day.

Morgan Stanley (MS) told a similar story. It beat estimates on both profit and revenue, yet shares fell nearly 3% in early trading. 

The AI and power trades aren’t getting rewarded either. IREN (IREN), a former Bitcoin miner that now rents out AI computing power, reportedly signed a multi-year cloud deal with Anthropic (though neither company has confirmed it). Within two days, the stock was down ~10%.

Meanwhile, Constellation Energy (CEG) announced a 20-year agreement to supply nuclear power to Google. The stock spiked briefly, but it’s already fallen back to its pre-deal levels.

Simply put, even great news isn’t helping stocks during this selloff.

Which begs two questions: Why is this happening… and how should investors react?

Why good news isn’t paying

The answer is simple: sentiment.

When investors are optimistic, they’re often willing to overlook short-term risks and pay higher prices for companies with strong earnings prospects.

But when fear takes over, those same investors become much more cautious. They start questioning whether even strong companies can justify their current valuations.

And right now, fear is taking hold.

CNN’s Fear and Greed Index currently sits around 30—firmly in “Fear” territory and approaching “Extreme Fear.”

And investors have good reason to be concerned. September consumer prices rose 3.7% from a year earlier, hotter than forecast, raising the odds of another Federal Reserve rate hike.

Higher rates create two problems for stocks.

First, they make borrowing more expensive for businesses, potentially squeezing profits and making future growth more costly to finance.

Second, they make safer investments more attractive. When investors can earn around 4% on short-term Treasuries, they’re less willing to take on the additional risk of stocks without a compelling potential return.

Meanwhile, earnings expectations remain high. After several quarters of strong profit growth, companies have to do more than beat Wall Street’s estimates; they need to convince investors the growth will continue.

And with inflation and borrowing costs rising, that’s becoming a tougher sell. In fact, Bank of America expects S&P 500 earnings to grow 33% in 2026. Yet the bank sees only about 2% upside for the index over the next 12 months.

That’s a perfect example of the disconnect: Companies can keep growing their profits even as investors become less willing to pay a premium for those earnings.

It’s time to hold some cash

For the first time in years, investors can earn a meaningful return while they wait for better opportunities. Short-term Treasury bills are yielding around 4%, and many money market funds offer competitive yields.

Better yet, holding some cash also gives you the flexibility to buy great companies at better prices if the market continues falling.

To be clear, that does not mean investors should sell everything. Several sectors are holding up well amid the chaos, including energy and healthcare.

But given the current environment, keeping some powder dry is a great way to build in some portfolio protection and flexibility.

What comes next

We’re still in the early stages of earnings season, with hundreds of S&P 500 companies scheduled to report over the next few weeks.

Plenty of companies will likely deliver strong results only to see their stocks pull back. That’s what investors should watch closely.

If companies keep beating expectations while their shares fall, it would suggest investors are growing more cautious about valuations and the economic outlook.

On the other hand, if strong earnings start driving sustained rallies, that could signal an improved appetite for risk.

For now, investors should keep targeted market exposure, hold some cash, and prepare to take advantage of better prices if the selling continues.

For more on navigating this earnings season—and the stocks Frank is watching for buying opportunities—check out Curzio Alpha.