Many investors are optimistic about the prospects of a year-end rally in the stock market, yet some experts caution that a pullback in the fourth quarter should not be dismissed. Marta Norton, chief investment strategist at Empower Investments, emphasizes that while historical patterns often suggest stability in the final months of the year, the market has indeed seen declines in the past. “Lots of people will say, ‘it’s like the market never sells off in the fourth quarter.’ If you have momentum going into the fourth quarter, you’re going to maintain it,” she noted. However, she warns that this perception can be misleading: “It never sells off until it does, right?”
Optimism among investors is buoyed by several favorable developments. The Federal Reserve’s recent decision to ease interest rates, the conclusion of the most troubling tariff announcements, and the seasonal trends that typically benefit the market in the fourth quarter contribute to this positive outlook. Additionally, the bullish sentiment surrounding artificial intelligence continues, augmented by expectations that the proposed One Big Beautiful Bill Act will lend support to equities.
Nevertheless, current stock valuations have led some to express caution. The S&P 500 is trading at a forward price-to-earnings ratio of 22, a level close to its peak since spring 2021, and the index remains near all-time highs. In light of this, Norton suggests that investors might consider taking profits or rebalancing their portfolios into more attractively priced assets.
Recent market activity reflected these uncertainties. The S&P 500 experienced fluctuations on Wednesday as the momentum in the AI sector began to wane, following a decline in prominent AI stocks such as Nvidia. A remark from Federal Reserve Chair Jerome Powell implying that the equity market could be overvalued added to investor anxiety.
Norton identifies two significant risks that could impact the stock market adversely. First, she warns that any major disruptive event, such as the emergence of a new competitor in the AI space like DeepSeek, could undermine the prevailing bullish narrative. Notably, the “Magnificent Seven” stocks, which include leading tech names, now make up over one-third of the S&P 500.
The second risk factors in potential weakness within the labor market, which, while remaining tight, has shown signs of softness in recent data. “If you get any material surprise on that front, I think you could just see some weakness,” she stated.
Although she acknowledges that corporate and household debt levels appear manageable and consumers are holding steady, she cautions that unforeseen developments could disrupt market stability. “It’s hard to say that there’s going to be a fundamental break,” she adds, “but that doesn’t mean something out of left field couldn’t happen that just kind of deflate the equity market or take some of the momentum out of it. So, it’s more just being aware of that and resetting expectations for the possibility that things might not always just grind ever higher.”
