How can God's refutation of the Jews and Christians—that their torment is proof that they are not His beloved—be reconciled with the fact that the suffering of Muslims in this world—such as killing, captivity, and calamities—does not negate their status as a favored nation?

Summary of the Answer: The hadith mentioned in the question was reported by Ahmad, Al-Hakim, and others. Al-Hakim authenticated it, and Al-Dhahabi and Al-Albani concurred, while Shu'ayb Al-Arna'ut deemed it weak.

The verse (فَلِمَ يُعَذِّبُكُم بِذُنُوبِكُم) "Why then does He punish you for your sins?" mentions punishment for sins. It does not negate other reasons for suffering, such as trials to raise ranks or expiate sins, which include the trials of prophets and children.

Ibn Ashour stated that the verse refutes the claim of Jews and Christians that they are the children of God and His beloved ones, arguing that a lover does not punish his beloved, and a father does not punish his children. He pointed out that Jews acknowledge punishment in this world and the hereafter, and Christians acknowledge deserving otherworldly punishment due to Adam's sin before their redeemer Jesus.

The suffering that afflicts believers may be an expiation for their sins (وَمَا أَصَابَكُم مِّن مُّصِيبَةٍ فَبِمَا كَسَبَتْ أَيْدِيكُمْ) "And whatever strikes you of disaster - it is because of what your [own] hands have earned," or for raising their ranks (مَا أَصَابَ مِن مُّصِيبَةٍ إِلَّا بِإِذْنِ اللَّهِ) "No disaster strikes except by permission of Allah." What is negated is punitive punishment alongside love, not suffering as a trial or expiation.

The hadith "This Ummah of mine is a merciful Ummah; there is no punishment upon it in the Hereafter" means that the punishment of this Ummah in this world is through tribulations, earthquakes, and killings, which serve as expiation for their sins. The hadith may also refer to a specific group within the Ummah, or the Ummah that truly followed the Prophet.