NEW YORK — The U.S. stock market is currently experiencing a roaring rally, but it will soon face a series of challenges in the form of economic data, political uncertainty, and corporate earnings. As investors navigate through one of the most volatile periods of the year for equity markets, they must be prepared for potential market swings and be cautious in their investment decisions.
The benchmark S&P 500 index recently hit its first closing all-time high in two months after the Federal Reserve announced a 50-basis point rate cut, marking the beginning of the first U.S. monetary easing cycle since 2020. This has led to a 0.8% increase in the index so far in September, which is historically known as the weakest month for stocks. However, this volatile period could continue until the November 5th election, leaving the S&P 500 vulnerable to market swings.
Angelo Kourkafas, senior investment strategist at Edward Jones, stated, “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.” This sentiment is supported by data from Ned Davis Research, which shows that the second half of September is historically the weakest two-week period of the year for the S&P 500.
In addition, the S&P 500 has also experienced an average decline of 0.45% in October during presidential election years, according to data from CFRA dating back to 1945. This is further supported by an analysis from Edward Jones, which shows that volatility tends to increase in October during election years, with the Cboe Market Volatility index rising to an average level of 25 at the start of the month, compared to its long-term average of 19.2. Currently, the VIX is at 16.4.
This year’s close election between Republican Donald Trump and Democrat Kamala Harris is also a factor that could contribute to market volatility. Recent polls show a virtually tied race, and UBS equity derivative strategists stated in a note, “Unless the data deteriorates considerably, we think U.S. elections will start to be more at the forefront.”
Investors are also closely monitoring economic data to support expectations that the economy is experiencing a “soft landing,” where inflation moderates without significantly impacting growth. This is a more favorable scenario for stocks, as opposed to when the Fed cuts rates during recessions. The coming week includes reports on manufacturing, consumer confidence, durable goods, and the personal consumption expenditures price index, a key inflation measure.
Attention will also be on employment data, after Fed Chair Jerome Powell stated that the central bank wanted to stay ahead of any weakening in the job market as they announced the rate cut last week. The highly anticipated monthly U.S. jobs report is due on October 4th.
Art Hogan, chief market strategist at B Riley Wealth, stated, “We’re going to have hyper-focus on anything that speaks to the strength of the labor force.” This is because the rally in stocks has pushed up valuations, with the S&P 500 currently having 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 increase further, investors are relying on strong corporate earnings to support stock gains. Third-quarter reporting season begins next month, and according to LSEG IBES, S&P 500 earnings for the period are expected to have climbed 5.4% from the previous year, with a projected jump of nearly 13% in the fourth quarter.
However, the recent earnings report from delivery giant FedEx (FDX.N) serves as a reminder that not all companies may meet these expectations. The company reported a steep quarterly profit drop and lowered its full-year revenue forecast, causing its shares to tumble on Friday.
Scott Chronert, head of U.S. equity strategy at Citi, stated in a report, “Extended multiples put pressure on macro data and fundamentals to support S&P 500 prices.” This highlights the importance of strong economic data and corporate earnings in sustaining the current rally in stocks.
In conclusion, the U.S. stock market is facing a challenging period ahead, with potential market swings, political uncertainty, and the need for strong economic data and corporate earnings to support stock gains. Investors
