Stocks Bend, but Don’t Break, in Head-Spinning September. More Tests Are Coming.

The S&P 500 is down around 0.8% for the month, largely in line with the average September decline since the 1950s. (Michael M. Santiago/Getty Images)

Key Points

• U.S. stocks are on pace with expected declines for September, showing resilience despite surging Treasury yields and rising global crude prices.
• The S&P 500 is down about 0.8% for the month, while the Nasdaq Composite has held on to its end-of-August levels.
• Analysts expect collective S&P 500 profits for the third quarter to surge 30% from last year to around $768.8 billion.

U.S. stocks enter the final throes of September pretty much on pace with the kind of declines expected over the market’s historically weakest month, having fought through issues that could have pushed them firmly lower into the close of the third quarter.

A massive surge in Treasury bond yields, which lifted 10-year notes to the highest since 2007, paired with a worrying summer rally in global crude prices that has oil trading firmly north of $100 a barrel, leaned heavily on stocks but didn’t tip them over.

A Federal Reserve interest-rate hike, coupled with hawkish language and quickening inflation forecasts, also came and went, with stocks posting their strongest gains in six weeks and an index of the Magnificent Seven tech giants coming within half a point of the all-time high it reached in late May.

Tech stocks, in fact, have largely weathered a series of “end of days” headlines from the AI space, with an index of semiconductor stocks falling around 3.3% over the past month and those in the information technology edging just 1.2% lower despite the torrent of stories tied to apocalyptic AI risks.

Yet through all that, the S&P 500 is down around 0.8% for the month, largely in line with the average September decline since the 1950s, with the Nasdaq Composite holding on to its end of August levels.

The resilience is important heading into a barren three-week stretch for markets, followed by the third quarter earnings season with an update from JPMorgan on Oct. 13, and the potentially game-changing midterm elections on Nov. 3.

“The stock market has held up very well so far in September, but remains on eggshells thanks to rising oil prices and bond yields,” said Rick Gardner, chief investment officer at RGA Investments in Raleigh, N.C.

“But we’re not out of the woods when it comes to the volatility that typically arises during September and October,” he added.

Earnings are likely to provide near-term support, however, with analysts expecting collective S&P 500 profits for the three months ending in September to surge 30% from last year to around $768.8 billion.

That would put the index on pace for a full year gain of around 35%, the strongest since 2021, thanks largely to the tech and AI spending that has powered markets higher since the launch of ChatGPT in November 2022.

But can it lean on the faster inflation metrics, and the leg higher analysts are expecting in Treasury yields, into the final months of the year?

Brent crude, the global pricing benchmark for oil, has surged nearly 50% over the past 2½ months, pushing domestic gas prices nearly 40% higher on the year and taking diesel fuel costs to the highest on record at $6.45 a gallon.

Those elements will wreak havoc on inflation readings over the coming months, with Jeffrey Gundlach, founder of DoubleLine Capital, suggesting CPI readings will soon spike north of 4%.

“The psychology is that inflation is now trending higher,” he told CNBC earlier this week, citing inventory buildups in GDP readings and Costco’s decision to double the price of its Kirkland branded motor oil. “But I worry that the problem isn’t being respected.”

Bond markets are clearly concerned, with 10-year yields trending close to the 5% mark on Friday, having pulled back to as low as 4.935% during Thursday’s solid equity rally. An increasing number of Wall Street analysts are forecasting higher levels over the coming months.

John Davies, U.S. rate strategist at Standard Chartered, sees 10-year yields hitting 5.5% over the next 12 months, and testing 5.1% by the end of the year, “until the market is more confident that inflation will return to target.”

“AI-related investment and issuance, U.S. fiscal concerns, and Japanese repatriation risks remain either active or potential challenges” to the market, he added, “even if the impact of oil prices on yields eventually fades.”

Higher rates for longer, alongside a likely change in the composition of the House of Representatives, where Democrats hold a solid lead in polling into the November vote, will pose significant challenges for stocks into the close of the year.

Not everyone agrees, however.

“Equity and bond investors are arguably overreacting” to both the Fed’s recent hawkishness and the assumption of faster inflation reading blunting broader markets, said Fundstrat’s Tom Lee.

“That ‘max hawkish’ stance creates a bullish setup for equities,” he added, citing the likelihood of softer jobs data, muted inflation readings under a new PCE measuring format, and the lack of concern seen in broader VIX volatility readings, which remain pinned near the lowest levels of the year.

“We think there is a positive setup into month end, and the up move could be very sharply positive,” Lee said.

Autumn is approaching, the leaves are about to change and the weather will soon be colder.

Stocks will change, too. But just how much remains to be seen.

Write to Martin Baccardax at martin.baccardax@barrons.com

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