Worries about earnings growth potential and financial market dysfunctions lead the market

Stock traders and investors are going into the end of the month and end of the quarter with market near its lows.

Bulls continue to face strong headwinds amid worries about earnings growth potential and financial market dysfunctions.

Apple selloff

Investors seemed particularly caught off guard by a rare downgrade to Apple's stock by Bank of America following reports of low iPhone demand. The resulting selloff left the stock down almost -5% and wiped roughly -$120 from Apple's market cap. Apple is of course America's most valuable publicly traded company, which means it is the most heavily weighted stock in the S&P 500, accounting for over 7% of the index's total market value.

Naturally, a big selloff in Apple is going to drag on the broader market. BofA's downgrade also highlighted bigger concerns that are likely to weigh on other companies' profitability in the quarters ahead, most notably slower business and consumer spending, and a stronger US dollar.

Bears are quick to point out that early earnings results are already revealing weaker-than-expected Q3 results. Nike's results unveiled ongoing supply chain problems as well as lingering excess inventories and currency headwinds. CarMax yesterday was the latest in a long list of companies warning of increasing "affordability challenges" for consumers amid the highest inflation levels in some four decades and rising borrowing costs.

Declining affordability was a key reason behind Moody's downgrade yesterday of the entire global automotive industry from "stable" to "negative". The auto industry, similar to Apple, Nike, and most other companies, is also struggling with ballooning costs related to raw material shortages, tight labor markets, and skyrocketing energy prices.

Bottom line, the outlook for earnings in upcoming quarters is fading, making it tough for investors to justify pushing prices any higher at this point. Like I've mentioned many times, an earnings recession could actually be worse for the stock market than an actual full-blown economic recession.

Is the financial system at the risk?

Wall Street also remains nervous about contagion spreading from bond and currency market dysfunctions in the UK, Italy, Japan, China and others.

While every country has unique problems that are partially responsible for recent volatility, it also partially stems from the aggressive monetary tightening being conducted by most Western central banks.

In general, a rising rate environment tends to uncover imbalances and systematic risks that might be unknowingly lurking in financial systems. Just think back to the subprime mortgage crisis and Lehman Brothers collapse in 2008 that eventually erupted into a full-blown global financial meltdown.

Some contend it began when the Fed started lifting rates from 2004 to 2006, going from 1% to 5.25%, which led to an extreme slowdown in the housing market and ballooned the payments on subprime mortgages into unaffordable territory...and the contagion just spread from there.

So when financial markets start acting strangely and central banks are making emergency interventions, investors can be understandably nervous that an even bigger problem might be around the next corner.

On the geopolitical front, Russia is expected to formally annex four Ukraine regions in a ceremony today that's supposed to include an address from President Vladimir Putin. Some think Putin may offer to enter a ceasefire with Ukraine. While Ukraine is unlikely to agree, they could face pressure from western countries that are worried about the threat of a wider conflict with Russia.

Data to watch

Looking ahead to next week, the main highlight will be the September Employment Situation due out next Friday. There is a slew of other key data due as well, including ISM Manufacturing and Construction Spending on Monday; Factory Orders and the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday; ADP's private payroll report, the US Trade Balance, and ISM Non-Manufacturing on Wednesday; and Wholesale Inventories and Consumer Credit on Friday. The only earnings of note next week are Conagra Brands and McCormick & Co. on.