S&P 500 on Track for First September Gain in Five Years

September is shaping up to be a promising month for U.S. stocks, defying the usual seasonal expectations after the Federal Reserve implemented a significant interest rate cut. The S&P 500 showed some weakness on Friday but still managed to achieve its third consecutive weekly gain, with a 1.6% increase for the month. As the month comes to a close, the S&P 500 is on course to record its first September gain since 2019, according to data.

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Anthony Saglimbene, chief market strategist at Ameriprise Financial, remarked that the idea of a "soft landing" for the economy seems to be fully reflected in stock prices. He explained in an interview that the seasonal trend, where September typically proves challenging for stocks, didn’t play out as expected, largely due to the Federal Reserve's rate cut.

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The Federal Reserve announced on September 18 that it was reducing its benchmark interest rate by half a percentage point. This marked the beginning of the Fed's rate-cutting cycle, prompted by a noticeable easing of inflation and a desire to maintain a healthy labor market. Federal Reserve Chair Jerome Powell described the decision as a recalibration of monetary policy, taking into account the progress made in reducing inflation.

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A fresh inflation report released on Friday, using the personal-consumption-expenditures price index, showed that the annual inflation rate in the U.S. cooled to 2.2% in August. Following the release of the inflation data at 8:30 a.m. Eastern time on Friday, U.S. bond market rates fell, with Treasury yields retreating. Federal-funds futures began to reflect a higher likelihood of another significant rate cut by the Federal Reserve in November.

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The yield on the 2-year Treasury note dropped to 3.562%, marking its fourth consecutive week of declines. This was the longest streak of weekly decreases in 2-year Treasury yields since December 2020, according to Dow Jones Market Data. Similarly, the yield on the 10-year Treasury note fell to 3.751% on Friday.

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In general, Treasury yields have been declining throughout September as investors anticipated that the Federal Reserve would begin lowering interest rates. By Friday afternoon, the fed-funds futures market indicated a 54.8% chance that the Federal Reserve would opt for another half-point rate cut at its next policy meeting in November. This was an increase from the 45.2% probability traders had assigned to a smaller quarter-point cut from the current target range of 4.75% to 5%.

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Investors are keeping a close watch on various economic indicators, including inflation, economic growth, and corporate earnings, as these factors will determine the future direction of the stock market, according to Saglimbene. He emphasized that investors are looking for the stock rally to broaden, noting that cyclical stocks have recently taken the lead.

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Cyclical stocks, which are more sensitive to economic cycles, have been outperforming the technology sector in recent months. The materials, industrials, and financial sectors of the S&P 500 have all posted significant gains over the past three months, outpacing technology stocks. According to FactSet data, the S&P 500's industrials sector has surged by 10.7%, materials have gained 9.8%, and financials have climbed 10.3% over the past three months. In contrast, the tech sector has lagged with a modest 0.4% gain during the same period.

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This shift in market leadership is noteworthy, as the technology sector had been a key driver of the U.S. stock market's gains earlier in the year. Despite its recent underperformance, the tech sector is still up nearly 29% in 2024, helping to propel the S&P 500 to a year-to-date gain of 20.3%, according to Trade Algo.

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This week, the S&P 500's materials sector posted a 3.4% gain, marking its best weekly performance since December. Meanwhile, the tech sector trailed with a 1.1% gain, while the broader S&P 500 advanced by 0.6% for the week.

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Cooling inflation, signs of continued economic growth, and the Federal Reserve's large rate cut have revived the narrative of a soft landing for the U.S. economy. Saglimbene noted that this narrative gained renewed momentum in September. Looking ahead, third-quarter corporate earnings reports, which are expected to begin rolling out next month, will provide key insights into whether the stock market can continue to climb.

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On Friday, the Dow Jones Industrial Average rose 0.3%, reaching a new record high. In contrast, the S&P 500 slipped by 0.1%, and the Nasdaq Composite fell by 0.4%. Despite these minor setbacks, all three major U.S. stock benchmarks posted gains for the third consecutive week, according to Dow Jones Market Data.

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As September wraps up, investors are cautiously optimistic, watching for further signals from the Federal Reserve and corporate earnings reports to gauge whether the market can sustain its upward trajectory into the final months of 2024. With inflation cooling and the Fed taking steps to support the economy, the stock market appears poised for continued gains, though risks remain on the horizon.

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