S&P 500 and Nasdaq score their best September in 15 years. Can the momentum last through the rest of the year?

The S&P 500 and Nasdaq Composite recorded their best September in 15 years, rising 3.5% and 5.6% respectively, driven by the Federal Reserve's 25 basis point rate cut and expectations for further reductions, alongside an AI-driven rally in megacap tech and a record high for the Russell 2000. Despite this strong momentum, investors face near-term risks from a potential government shutdown, which could delay crucial economic data, and concerns that strong Q3 earnings growth may already be priced in. However, historical data suggests October initiates the strongest quarter for stocks, particularly following a robust September, indicating potential for continued year-end gains.

Analysis

U.S. equity markets concluded an atypically strong September, with the S&P 500 and Nasdaq Composite posting their best performance for the month in 15 years, gaining 3.5% and 5.6% respectively. This rally was principally driven by the Federal Reserve's 25 basis point rate cut to a 4.0%-4.25% range and guidance for two additional reductions this year, which fueled risk-on sentiment. Further momentum was provided by a renewed frenzy in artificial intelligence stocks, benefiting megacap technology, and a significant technical breakout in the Russell 2000, which reached its first record high since November 2021. Despite this bullish momentum and historically favorable Q4 seasonality, several near-term risks persist. A potential U.S. government shutdown threatens to delay crucial economic data, including the September jobs report, which is a key input for future Fed policy. Additionally, there are concerns that the market may have already priced in the projected 7.9% year-over-year earnings growth for the third quarter, creating a high bar for companies to exceed when reporting begins on October 14.

Key Decisions for Investors

• Consider maintaining exposure to equities to capitalize on strong technical momentum and historically bullish Q4 seasonality, particularly following a record-setting September.
• Closely monitor upcoming Q3 earnings reports, starting with major banks on October 14, to validate whether corporate performance justifies the market's recent rally and lofty valuations.
• Anticipate potential short-term volatility related to a possible government shutdown and prepare for heightened market sensitivity to the delayed September employment data, as it directly influences the Fed's rate-cutting path.
• Evaluate the broadening market rally by assessing opportunities in small-cap equities, as the Russell 2000's recent record high suggests risk appetite is expanding beyond megacap technology names.