The S&P 500 saw a significant increase of 3.5% in September, marking its best performance for the month since 2010. This unexpected rise is particularly noteworthy given that September has historically been the weakest month for the U.S. stock market, with the S&P 500 averaging a decline of 2% during this month over the past decade. The positive momentum is surprising also due to the prevailing uncertain economic outlook, fueled by the impact of tariffs.
The tariffs implemented during the Trump administration have driven the average tax on U.S. imports to its highest levels since the 1940s. Since their introduction in April, inflation has increased by six-tenths of a percentage point. Economists caution that consumers have not yet fully felt the ramifications, as companies have absorbed 60% to 70% of these costs in the short term. Additionally, businesses have been hiring at a slower pace, with the U.S. economy adding an average of only 27,000 jobs per month between May and August. This represents the worst four-month job growth period (excluding the COVID-19 pandemic) since the Great Recession of 2010.
Despite these complications, historical patterns suggest potential optimism for investors. The fourth quarter is generally recognized as the best quarter of the year for the U.S. stock market, often boosted by expectations of increased consumer spending during the holiday season. The S&P 500 has historically returned over 4% in the fourth quarter, with strong returns observed after a positive September.
The third quarter had shown resilience, whereby the S&P 500 advanced nearly 8% between July and August, marking its fourth-best performance during a third quarter since 1990. This uplift was largely attributed to robust economic conditions and better-than-expected earnings from most S&P 500 companies.
The upcoming fourth quarter is expected to maintain this positive trajectory, buoyed by potential holiday spending and year-end bonuses that typically lead to increased investments in the stock market. Historically, the S&P 500 has seen an average return of 4.2% between October and December.
Moreover, patterns indicate that when the S&P 500 performs well in September, it usually translates into a favorable following year. The index has only posted gains in September 19 times over the past 40 years, subsequently returning an average of 12% in the following 12 months. This surpasses the average annual return of 9.4% for the S&P 500 during that timeframe. Current forecasts from FactSet Research predict that the S&P 500 could reach 7,359 within a year, signaling nearly a 10% upside from the current level of 6,715.
However, there remains an underlying risk; the exact impact of the tariffs on the economy remains uncertain. Inflation trends are concerning, and the job market appears to show signs of weakness. Should these negative factors intensify, the stock market could experience sharp declines, emphasizing the need for investors to remain cautious and not take gains for granted.
