Key Takeaways
- September is historically the worst month of the year for stocks, with the S&P 500—and its precursor indexes before 1957—falling more than 1% on average since 1928.
- This September, investors contend with trade uncertainty, elevated inflation, a weakening job market, and President Trump’s threats to central bank independence.
- Still, experts point to strong earnings growth, impending interest rate cuts, and healthy AI demand as reasons to be bullish in the long term.
Stock prices, expectations, and uncertainty are all high heading into the fall. September is historically a rough month on Wall Street, but experts see ample reason to stay invested.
Since 1928, the S&P 500’s average September result has been a 1.1% slide, the worst performance of any calendar month, according to Yardeni Research. September is also the only month over the past 97 years—going back to before its 1950s expansion to 500 stocks—in which the index has declined on more occasions (53) than it’s risen (43). (Stocks finished September 1979 unchanged.)
There are plenty of theories seeking to explain the so-called September Effect. Some believe that investors returning from vacation are eager to rebalance portfolios or lock in profits after the historically strong summer months.
It’s also possible that mutual funds, which tend to end their fiscal years in September, purge their holdings to harvest losses. A step up in bond issuance after a summer lull could also draw money out of equity markets.
Plenty of Reasons for Caution This September
Whatever the reasons for the weakness, history tells investors to be wary of September. This time, there is a lot to be wary of.
Trade uncertainty was ramped up late last week when a federal appeals court ruled the Trump administration’s sweeping “reciprocal” tariffs were implemented illegally. The court gave President Donald Trump until mid-October to appeal the decision to the Supreme Court, which he is expected to do. In the meantime, Wall Street will be weighing the likelihood of a similar ruling by the high court, which would have huge implications for American consumers and business operations.
This month also brings pivotal jobs and inflation data. The August jobs report, due Friday, will be the first since Trump fired the head of the Bureau of Labor Statistics after July’s report showed the U.S. added far fewer jobs over the spring than previously thought. Recent inflation data suggests tariffs could soon push up prices as businesses gradually pass on higher costs to consumers.
Both reports will bear on the Federal Reserve’s next interest rate decision. Fed Chair Jerome Powell struck a dovish tone in last month’s speech at the Fed’s Jackson Hole Symposium, where he acknowledged a weakening labor market could warrant a rate cut despite persistent inflation risks. Wall Street widely expects the Fed will cut rates for the first time this year on Sept. 17.
Looming over it all is Trump’s efforts to exert greater influence over the central bank. Markets have thus far mostly shrugged off his attempts, but if Trump succeeds in bending the central bank to his will, it could shake global confidence in the Treasury market, the ripple effects of which could be felt in stock portfolios.
Reasons for Optimism Include Earnings, Rate-Cut Hopes
The market appears set for a turbulent September, but most analysts agree that the long-term outlook for stocks skews positive.
“Despite the potential for volatility and short-term pullbacks, we believe investors who are underallocated to equities should consider phasing in and using market dips to add equity exposure,” wrote UBS’ Chief Investment Office analysts on Tuesday. UBS expects the S&P 500 to reach 6,800 by the end of next June, suggesting 5% upside from Friday’s close. The index is up about 9% this year.
Healthy corporate earnings, impending rate cuts, and AI investment are a few of the forces underpinning their bullishness. About 80% of the S&P 500 reported better-than-expected second-quarter results, and the index as a whole has increased earnings by more than 12%. The strong results have led Wall Street analysts to raise their third-quarter earnings estimates by 0.5%, the first such increase in more than a year and the largest since 2021.
Big tech has accounted for an outsized share of earnings growth in the past few years, and robust demand for artificial intelligence is expected to keep revenue and profit growing at a healthy clip. UBS forecasts global tech earnings will grow by double digits this year and next.
Traders expect the Fed to cut rates by as much as 50 basis points before the end of the year, which should lower interest expenses for consumers and businesses, as well as increase the capital flowing into stocks. “Periods in which the Fed cuts rates while the economy is still growing have historically been associated with positive equity market returns,” according to UBS.