History Says Sell in September. Wall Street Is Saying ‘Keep Buying’

Introduction to September Stock Market Trends

September is historically the worst month of the year for stocks, with the S&P 500 falling more than 1% on average since 1928. This trend, known as the "September Effect," has been observed for nearly a century, with the S&P 500 declining on more occasions (53) than it has risen (43) during this month. Various theories attempt to explain this phenomenon, including investors rebalancing their portfolios after the summer months and mutual funds purging their holdings to harvest losses.

Historical Context of the September Effect

Since 1928, the S&P 500’s average September result has been a 1.1% slide, the worst performance of any calendar month. This trend has been consistent over the years, with September being the only month where the index has declined more often than it has risen. The reasons behind this trend are not entirely clear, but some possible explanations include investors returning from vacation and rebalancing their portfolios, or mutual funds selling off holdings to realize losses.

Current Market Conditions and Challenges

This September, investors face a range of challenges, including trade uncertainty, elevated inflation, and a weakening job market. The recent federal appeals court ruling that the Trump administration’s tariffs were implemented illegally has added to the uncertainty, and the upcoming jobs and inflation data will be closely watched. The Federal Reserve’s next interest rate decision will also be crucial, with many expecting a rate cut to boost the economy.

Factors Contributing to Market Uncertainty

The trade uncertainty and potential implications of the tariffs on American consumers and businesses are significant concerns. The jobs report, due in early September, will provide insight into the labor market, while the inflation data will help determine the likelihood of a rate cut. Additionally, President Trump’s efforts to exert influence over the Federal Reserve could have far-reaching consequences for the economy and stock market.

Reasons for Optimism in the Stock Market

Despite the potential for volatility and short-term pullbacks, many analysts believe that the long-term outlook for stocks is positive. Healthy corporate earnings, impending rate cuts, and robust demand for artificial intelligence are expected to drive growth. About 80% of the S&P 500 reported better-than-expected second-quarter results, with the index as a whole increasing earnings by more than 12%. Wall Street analysts have raised their third-quarter earnings estimates, and big tech is expected to continue driving earnings growth.

Supporting Factors for a Bullish Outlook

The strong earnings growth, combined with the expectation of rate cuts, is expected to boost the stock market. The demand for artificial intelligence is also expected to drive revenue and profit growth in the tech sector. UBS forecasts global tech earnings to grow by double digits this year and next, and traders expect the Fed to cut rates by as much as 50 basis points before the end of the year. This should lower interest expenses for consumers and businesses and increase capital flowing into stocks.

Conclusion

In conclusion, while September is historically a challenging month for the stock market, there are reasons to be optimistic about the long-term outlook. The strong earnings growth, impending rate cuts, and robust demand for artificial intelligence are expected to drive growth and boost the stock market. However, investors should remain cautious and be prepared for potential volatility and short-term pullbacks. By understanding the historical context and current market conditions, investors can make informed decisions and navigate the challenges and opportunities in the stock market.