After overcoming the "September curse" in the U.S. stock market, investors expect continued gains in October. The put/call ratio in the options market has dropped to its lowest level since July 2023. The S&P 500 index is poised to achieve its best first nine months since 1997, indicating strong investor optimism. Nevertheless, attention is focused on upcoming employment reports and Federal Reserve actions due to high economic recession risks predicted by institutions like the New York Fed.
Historically, September has been a challenging month for U.S. stocks, but with the upcoming presidential election, Federal Reserve policies, and recession concerns in mind, investors anticipate an optimistic market outlook for October.
In September, the major U.S. indices experienced a rough start, with significant declines in tech, AI, and semiconductor stocks. The S&P 500 had a weekly drop of over 4%, while the Nasdaq 100 fell nearly 6%, and the semiconductor index slumped by 12%. NVIDIA (NVDA, Financial) saw a 14% weekly drop, marking its worst performance in two years. However, improved inflation data and resilient economic indicators led to a rebound, with indices achieving three consecutive weeks of gains and the S&P 500 potentially rising by 5.1% for the third quarter, the best performance since 1997.
This rally was not driven solely by tech giants, as the S&P 500 equal-weighted index, which gives equal weight to all companies, outperformed the regular market-cap weighted index. This indicates a broader market participation in the rally. The S&P 500 equal-weighted index's performance exceeded the regular index significantly, marking the largest outperformance since Q4 2022.
Optimism for a market rise continues to grow among investors. For example, Mary Ann Bartels, Chief Investment Strategist at Sanctuary Wealth, predicts the S&P 500 could reach 6,000 points by the end of 2024, a 4.6% increase from its recent close. Hedge fund trading data and a low put/call ratio further suggest positive market sentiment.
Nonetheless, risks remain. The Federal Reserve aims for a soft landing post-aggressive rate hikes, a challenge historically. New York Fed data still indicates a high probability of recession within the next year. Upcoming employment reports will be critical for gauging economic health and guiding the Fed's next rate decisions. Despite these risks, the Atlanta Fed's GDPNow model forecasts a 3.1% annual growth rate for Q3, up from 3% in Q2.
In the coming weeks, investors will navigate multiple key events, including employment reports, major corporate earnings, the U.S. presidential election, and the Fed's rate decision on November 7. Debates continue over the extent of the next rate cut, with a 50 basis point reduction becoming more probable in the swap markets.
Technology stocks, particularly semiconductor stocks, are expected to recover, bolstering market momentum. Rich Ross of Evercore ISI is optimistic about semiconductor stocks in Q4, particularly after Micron Technology's (MU) strong sales forecast. The VanEck Semiconductor ETF, which rose 45% in the first three quarters, is expected to gain another 20% by year-end. However, some analysts, like Dan Suzuki of Richard Bernstein Advisors, caution against market breadth narrowing, which could signal unhealthy market conditions.
