September is usually the toughest month of the year for stocks, and this one threw a lot at the market. The Fed raised rates for the first time since 2023. The rate on a ten-year government bond climbed to 5%. Oil flirted with $100 a barrel.
Through Friday, the S&P 500 was down just 0.5% for the month. It is up 11.8% for the year, and it is bouncing again this morning as oil pulls back.
Here is where I stand. I am bullish, and I like the setup heading into the last three months of the year.
In this report I am going to cover four things. How September and the year are shaping up. Five reasons I’m bullish. Two reasons for caution. And what I am watching this week.
September, and the Year So Far
On Wednesday the Fed raised interest rates for the first time in three years. That matters. Rates set what you pay on a mortgage, a car loan and a credit card, and what it costs a company to borrow and grow. When they rise, the economy tends to cool and safe bonds start competing with stocks.
That is why stocks usually struggle when rates go up. This time the market dipped for a day or two, then finished the week within about 2% of its August record. That tells me the business picture underneath is strong.
When I step back and look at the whole year, I like what I see. March was a tough month, April was one of the best in years, and the market has made slow, steady progress ever since. The clients who stayed patient through the spring have been richly rewarded for it.
Why the S&P 500 Keeps Holding Up
The answer is earnings.
The 500 companies in the index are expected to earn 31.8% more this year than last. That is an enormous number. When profits grow like that, a market can take a rate hike in stride and keep moving.
Five Reasons I’m Bullish on the S&P 500
Earnings season is three weeks away
Companies start reporting third-quarter results in mid-October, and analysts expect them to earn 28.9% more than a year ago. A stock is a share of a company’s profits. Those profits are still climbing, and that is what I am investing in.
You are not overpaying for it
Today you pay about $19.10 for every dollar of profit these companies are expected to earn over the next year. The five-year average is $19.80. Stocks are near a record, and a dollar of profit costs a little less than it has in recent years.
The best stretch of the year starts next week
September has been the weakest month on the calendar since 1950. The three months that follow have been the strongest. The fourth quarter has averaged a 4.1% gain and finished higher about four years out of five.
The midterms are six weeks away
Americans vote on November 3. U.S. Bank looked at 31 midterms going back to 1900, and stocks averaged 12.4% in the year that followed. BlackRock found the market has typically firmed up about a month before the vote. That window opens right around the start of October.
Record highs tend to lead to more of them
The S&P 500 has closed at a record 27 times this year. Between 1988 and 2023, the index gained an average of 13.4% in the twelve months after a record close, compared with 11.9% for any twelve months. Strength has generally followed strength.
Two Reasons for Caution
Neither of these is a reason to sell. They are the two things I keep an eye on for my clients.
Interest rates
A ten-year government bond now pays about 5%, and the Fed has signaled one more increase may come this year. If rates keep climbing, stocks could have a slower stretch. I am comfortable because profits are growing much faster than rates are rising.
A few very big companies are doing a lot of the work
The seven largest companies now make up about 34% of the S&P 500, more than at any point in modern history. They are terrific businesses and I am glad my clients own them. To me it is a reason to stay spread out, here and overseas, not a reason to sell.
What I’m Watching This Week
This is the last full week of September, and it has a few big moments packed into it.
The meeting with China is the one I care most about. A longer truce on tariffs would be good news for a lot of the companies we own, especially in technology. I expect some headlines and a few choppy days around it. I do not expect it to change what these companies earn.
Here Is My Plan
We are staying fully invested in quality companies, here and overseas. That is where the earnings are.
Anything can happen. But I see profits still climbing, a fair price on those profits, and a calendar that has generally been kind in the months ahead. That is a good place to be as the fourth quarter begins.
Expect a few bumpy days along the way. They are all part of the game, and my job is to keep us disciplined through them.
Stay focused on the fundamentals. Stay invested, stay diversified.
Related Reading
As always, if my outlook changes, my clients and readers will be the first to know. I’ll be back with another update soon — enjoy the start of fall!
Until next time,
