New York City, also known as the financial capital of the world, is currently facing a volatile period in the equity markets. The benchmark S&P 500 index has recently hit an all-time high, but the coming weeks will put it to the test as it faces a gauntlet of economic data, political uncertainty, and corporate earnings reports.
The S&P 500 has had a strong year so far, with a 19% gain year-to-date. However, September has historically been the weakest month for stocks, and this trend could continue until the November 5th election. According to strategists, this could leave the index vulnerable to market swings.
Angelo Kourkafas, senior investment strategist at Edward Jones, explains, “We’re entering that period where seasonality has been a bit less favorable. Despite the excitement about the start of the new rate-cutting cycle, it could still be a bumpy road ahead.”
In fact, the second half of September has been historically the weakest two-week period for the S&P 500, according to a Ned Davis Research analysis. Additionally, data from CFRA going back to 1945 shows that the index has logged an average decline of 0.45% in October during presidential election years.
Moreover, volatility tends to pick up in October during election years, with the Cboe Market Volatility index rising to an average level of 25 at the start of the month. This is higher than its long-term average of 19.2, according to an Edward Jones analysis of the past eight presidential election years. Currently, the VIX is at 16.4.
This year’s close election between Republican Donald Trump and Democrat Kamala Harris could add to the market’s sensitivity. Recent polls show a virtually tied race, and investors will be closely monitoring any developments that could impact the outcome.
UBS equity derivative strategists said in a note, “Unless the data deteriorates considerably, we think U.S. elections will start to be more at the forefront.”
Investors are also looking for data to support expectations that the economy is experiencing a “soft landing,” where inflation moderates without significantly hurting growth. This scenario is more favorable for stocks, as opposed to when the Fed cuts rates during recessions.
The coming weeks will see a slew of economic data, including reports on manufacturing, consumer confidence, durable goods, and the personal consumption expenditures price index, a key inflation measure. However, all eyes will be on the monthly U.S. jobs report on October 4th, after Fed Chair Jerome Powell stated that the central bank wants to stay ahead of any weakening in the job market.
Art Hogan, chief market strategist at B Riley Wealth, says, “We’re going to have hyper-focus on anything that speaks to the strength of the labor force.”
Meanwhile, the recent rally in stocks has pushed up valuations. The S&P 500 currently has a price-to-earnings ratio of 21.4 times expected 12-month earnings, well above its long-term average of 15.7, according to LSEG Datastream.
With limited room for valuations to go higher, investors are now looking to corporate earnings to support stock gains. Third-quarter reporting season will kick off next month, and according to LSEG IBES, S&P 500 earnings for the period are expected to have climbed 5.4% from the prior year, with a jump of nearly 13% in the fourth quarter.
However, the recent earnings report from delivery giant FedEx has caused some concern. The company reported a steep drop in profits and lowered its full-year revenue forecast, causing its shares to tumble.
Scott Chronert, head of U.S. equity strategy at Citi, explains, “Extended multiples put pressure on macro data and fundamentals to support S&P 500 prices.”
Despite the challenges and uncertainties ahead, investors remain optimistic about the future of the U.S. stock market. The Federal Reserve’s recent rate cut and the expectation of a “soft landing” for the economy provide a positive outlook for stocks. However, it will be crucial for economic data and corporate earnings to support this optimism and sustain the market’s momentum.
