The U.S. government shutdown is dominating investor attention as markets enter a seasonally strong fourth quarter, with equities near record highs. While the shutdown risks delaying crucial economic data, potentially complicating Federal Reserve policy decisions and causing a temporary drag on growth, most analysts do not anticipate it will derail the broader market rally. Underlying strengths, including robust corporate earnings (S&P 500 Q3 earnings growth expected at 8.8%), favorable Q4 seasonality, and the prospect of further Fed rate cuts, are seen as supportive, leading many to expect a sideways market rather than a significant downturn.
NEW YORK, Oct 3 (Reuters) - The U.S. government shutdown tops investors' agenda next week as markets head into the seasonally strong fourth quarter, with equities near record highs bracing for an earnings-season test later this month. A deep partisan rift in Washington led to a federal government shutdown that risks delaying crucial economic data and could potentially muddy the Federal Reserve's policy-easing outlook. Get a daily digest of breaking business news straight to your inbox with the Reuters Business newsletter. Sign up here. Few on Wall Street expect the Washington impasse to derail a rally that has lifted the S&P 500 (.SPX) by 14% to repeated record highs, but with little in the way of major data or earnings, the Capitol Hill drama is set to dominate investor focus. Advertisement · Scroll to continue "The shutdown and the potential reopening ... that's going to get almost all investor attention," said Mark Hackett, chief market strategist at Nationwide. Investors' main worry is that the shutdown will suspend the flow of timely economic data. Should the data drought last several weeks, it could cause confusion about the Fed's monetary policy path, as the central bank will be without government data that helps guide its decisions. It also poses a possible drag on economic growth the longer it extends. But for now, there is little reason to panic, investors said. BULLS IN CHARGE Despite some softness in labor data, the U.S. economy has borne the onslaught of trade and tariff headlines well and corporate earnings have supported stocks' march higher. Advertisement · Scroll to continue Analysts as of Thursday expected earnings from S&P 500 companies to increase 8.8% in the third quarter from a year ago, up from forecasts of 8.0% growth at the start of July, according to LSEG data. "In my opinion, lack of data actually puts more burden of proof on bears than it does on bulls," Hackett said. Investors will get a taste of the upcoming earnings season, with Levi Strauss (LEVI.N) and Delta Air Lines (DAL.N) set to report results on Thursday. "The most likely scenario is the market's just kind of calm ... moving sideways during the shutdown," Hackett said. KEY Advisors Wealth Management CEO Eddie Ghabour, who sees the shutdown possibly stretching for two to four weeks, echoed the sentiment. "If we're right on the shutdown stretching out, if you get extra stimulus in the economy in the form of two more rate cuts, and then the government is back in business, you're going to see a huge re-acceleration of growth in the economy and the equity markets," Ghabour said. Investors will get a read on what Fed policymakers were thinking when they cut rates in September when the minutes of that meeting are released on Wednesday. SEASONALLY STRONG For stock bulls, it helps that the just-started fourth quarter is historically the S&P 500's strongest, with an average gain of about 2.9% and a high share of positive returns, according to LSEG data going back to 1928. "Despite headline risks and the potential for short-term volatility, the weight of the evidence continues to support a constructive stance," Keith Lerner, co-chief investment officer at Truist Advisory Services, said in a note on Thursday. "As always, we will continue to follow the weight of the evidence." Meanwhile, the market's strong momentum has stock bears in hibernation. The S&P 500 logged its 30th record closing high of the year on Thursday. "The shutdown is going to be the news, but I think the underlying backdrop is really three things, seasonality, which is positive, the tailwind of rate cuts to protect the labor market ... and we have momentum in the markets," said Sonu Varghese, global macro strategist at Carson Group. "We've been overweight equities and we are continuing to be that," he said. Reporting by Saqib Iqbal Ahmed; Additional reporting by Laura Matthews; Editing by Alden Bentley and Jamie Freed Our Standards: The Thomson Reuters Trust Principles. The primary headwind facing U.S. equity markets, which are entering the historically strong fourth quarter near record highs, is the ongoing government shutdown. Investor focus is fixed on this political impasse, which poses two main risks: a suspension of timely economic data, potentially complicating Federal Reserve policy decisions, and a drag on economic growth if prolonged. Despite these concerns, prevailing Wall Street sentiment remains bullish, with analysts not expecting the shutdown to derail a rally that has already seen the S&P 500 gain 14% year-to-date. This optimism is underpinned by strong fundamentals, including an upwardly revised forecast for S&P 500 Q3 earnings growth to 8.8% and the prospect of additional Fed rate cuts acting as a stimulus. Furthermore, the market is supported by powerful historical seasonality, as Q4 is typically the S&P 500's strongest quarter with an average gain of 2.9% since 1928, and significant market momentum, evidenced by the index recently logging its 30th record high of the year. The consensus view anticipates a sideways market during a short-term shutdown, with a government reopening and further stimulus expected to fuel a re-acceleration in growth.
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