A Chill Blows Through Wall Street
Labor Day has passed in the U.S. Summertime, or at least the lazy, hazy, crazy, vacationy part of summer is over. Back to work. Back to school in the northern states. (The south has been back to school for a month already.) Time to buckle down. For markets, that could mean some trouble and not just due to seasonality, though those historical trends are a factor.
Looking over domestic stock market results since 1928, we see that the S&P 500 or its predecessors have posted an average return of -1.2% for the September. This makes September the worst month for stocks in the U.S. on average by far. Ten of the 12 months have posted positive average returns over that time frame. Only February lives on the dark side with September and February’s average return since 1928 stands at -0.1%, so that month does not run a close second place to September.
For those about to point out that Standard and Poors only created the S&P 500 in 1957, you would be correct. Readers might not know that Standard and Poors introduced a 90-stock composite index back in the 1920s that was expanded into what became the S&P 500 in 1957, so this entire time frame is pretty close to an apples-to-apples comparison. What month is the best for U.S. stocks? July has returned 1.7% on average. Five months have averaged a return of 1% or greater.
Some folks think that October is the roughest month of the year for U.S. stocks and that makes some sense. The stock market crashes of 1929 and 1987 both occurred in the month of October. Then there was the mini crash of 1989. For those not quite as old as I, yes, October 2008 was the worst month for U.S. stocks of the entire “Great Financial Crisis” era. Tha said, over the long haul, even if October might be the most volatile month of the year, the month returns an average of 0.5%, followed by a 1% return for November and a 1.3% return for December. Short story long? Keep your helmet on for a bit and buckle your chinstrap.
Tuesday Trouble
Equity index futures are trading lower in the U.S. on Tuesday morning as tensions in the Middle East remain in focus. Front-month crude oil futures prices extended Monday gains after Saudi Arabia was forced to announce that several energy facilities within the kingdom were forced to halt operations due to attacks by Iran-backed Houthi militants. Iranian-backed forces have repeatedly targeted the Saudi’s 400,000 barrel per day Jazan refinery of late. These attacks have wounded a number of civilians inside the kingdom.
Over the weekend, the U.S. and Iran traded retaliatory attacks. The U.S. military’s Centcom reported attacking two Iranian oil tankers over the weekend, including one near Kharg Island. The U.S. also reported having “completely destroyed’ a third Iranian tanker in the Gulf of Oman. Iranian state media confirmed these attacks and claimed to have attacked three U.S.-linked vessels in response as well as three other vessels using the U.S.-sanctioned route through the Strait of Hormuz.
According to Centcom, that’s not exactly true. The U.S. Navy reported that two of its warships came under fire ahead of the U.S. attacks on the three vessels. The U.S. Navy reports no damage to either those ships or casualties related to the events among service members. Centcom also claimed that the three Iranian-linked vessels that were hit, were operating as part of Iran’s “shadow network” that works to fund Iran’s Revolutionary Guard Corps as well as that nation’s military proxies.
Trade War Escalates
This morning, Canada’s “retaliatory” tariffs on U.S. goods also took effect. Effective at 12:01 a.m. on Tuesday morning, Sept. 8, the measures impose 15%, 25%, and 50% tariffs on about $20 billion of U.S. imports. This includes steel, aluminum, dairy, appliances, agricultural equipment, pulp, paper, plastics, and electronics. Goods already in transit have been exempted.
U.S.-based companies likely to be negatively impacted include Deere ($DE), Caterpillar ($CAT) and AGCO ($AGCO) on the agricultural side as well as Kraft Heinz ($KHC), General Mills ($GIS), Tyson Foods ($TSN), and Hormel Foods ($HRL) on the dairy / food products side. Electronics / appliances manufacturers potentially impacted would be Eaton ($ETN), Emerson Electric ($EMR) and Honeywell ($HON) while materials companies impacted could be International Paper ($IP), Dow ($DOW), and LyondellBasell ($LYB).
Investors will also have to keep an eye on the U.S. automakers as already existing Canadian counter-tariffs on U.S. vehicles continue to pressure that group. Separately, Bombardier ($BDRBF) now faces uncertainty after U.S. President Donald Trump threatened new tariffs unless the Canadian company makes its aircraft for the U.S. market in the U.S.
Then There Was August Job Creation
Fed officials arguing for a more hawkish policy stance have now been emboldened in the wake of Friday’s blowout release by the Bureau of Labor Statistics. The sheer strength in job creation reported for August came as a shock to most economists as did the upward revisions to job creation for June and July. Whether or not we can trust the data as it is always revised, is not the issue.
The issue is that the market, being that humans are no longer involved in the process of price discovery, believes whatever is inputted. So, as traders and investors, we must pretend to be a little stupid. Otherwise, the high-speed, keyword reading algorithms that rule the roost will run us over.
The facts are this: The U.S. Ten-Year Note paid 4.75% ahead of the release. That same Note paid more than 4.8%. Perhaps more telling, the yield on the Three-Month U.S. T-Bill now runs at more than 3.86% after falling as low as 3.82% ahead of Friday’s release.
The Week That Was…
Last week ended on a sour note for U.S. financial markets as on Friday, the Bureau of Labor Statistics posted very strong results for job creation for the month of August. Along with those results came upward revisions to the two months prior. It was felt that this weakened the case of dovish economists hoping to delay the Fed’s policy fight against inflation. Despite moderate losses on Friday, both the S&P 500 and Nasdaq Composite posted their fifth winning week in the past six. This is how last week went at the index level…
- The S&P 500 lost 0.51% on Friday but gained 0.09% for the week.
- The Nasdaq Composite lost 0.29% on Friday but gained 0.4% for the week.
- The Nasdaq 100 gained 0.38% on Friday and 0.21% for the week.
- The Russell 2000 added 0.11% on Friday and 0.25% on the week.
- The S&P Small Cap 600 moved 0.37% higher on Friday, and 0.14% lower for the week.
- The S&P Midcap 400 tacked on 0.14% on Friday and 0.15% for the week.
- The Dow Transports ran 0.72% on Friday but gave up 1.72% for the week.
- The Philly Semis popped for 3.37% on Friday to gain 2.32% on the week.
- The KBW Bank Index gave back 0.08% on Friday but added 1.29% for the week.
On Friday, eight of the 11 S&P sector SPDR ETFs closed out the session in the red, led lower by the Discretionaries ($XLY) and Communication Services ($XLC). Technology ($XLK) was the big winner for the day.
For the week, just four of the 11 S&P sector SPDR ETFs finished the period in the green with six in the red. Energy ($XLE) easily led the winners, while the discretionaries were the big loser. The financials ($XLF) closed out the five-days unchanged, which is almost impossible to do in the decimalized era. There was again no clear visible leadership (for a second straight week) evident for the week in the ongoing battle between cyclical and defensive sectors.
Week Ahead
As we race ahead into the oncoming holiday-shortened week:
The Geopolitical: The threat from this arena never ends. If it seems like I’ve written that before, I have. The Iranian government appears to think that a deal with Oman to fully open the Strait of Hormuz is imminent. That said, U.S. and Iranian forces continue to exchange rocket fire. In the meantime, the Wall Street Journal is reporting that Iranian oil export revenue is slowing dramatically as the U.S. naval blockade has seemingly been successful in strangling that economy, preventing shipments from the Persian Gulf and other offshore stockpiles from reaching traditional customers such as China. In other news, Bloomberg is reporting that Canada is preparing to escalate the burgeoning trade war between that nation and the U.S.
Macro: Last week was “August jobs” week.” This week is “August inflation week.” On Thursday morning, the Bureau of Labor Statistics will release its data for producer level (PPI) inflation for the month of August. On Friday, the 25th anniversary of the horrific attacks on New York City and the Pentagon by extremist terrorists, that same agency will release its August data for consumer level (CPI) prices. In addition, the University of Michigan will release the preliminary survey results for its September report on consumer sentiment. On top of that, the U.S. Treasury will auction off $39 billion worth of Ten-Year Notes on Wednesday afternoon and $22 billion worth of Thirty-Year Bonds on Thursday afternoon.
The Federal Reserve: You won’t hear from the Fed this week. That crew has now gone into their eight times a year media blackout period ahead of next week’s policy meeting and quarterly economic projections. This comes after Fed Gov. Christopher Waller appeared to differ in opinion of the trajectory of policy last week from Fed Chair Kevin Warsh.
Earnings: Second-quarter earnings season has, for all intents and purposes, come to a close. Throw in a holiday and this will make for a very light week for earnings releases. That doesn’t mean we will have nothing to look at. A few headliners are set to report. This Wednesday, we’ll hear from Chewy ($CHWY) and Signet Jewelers ($SIG). Macy’s will go to the tape on Thursday morning followed by Adobe ($ADBE) and Oracle ($ORCL) on Thursday afternoon. Finally on Friday, Kroger ($KR) will publish their quarterly results.
Corporate Events: On Wednesday, Apple ($AAPL) is planning its “Surprise and Shine” launch event. The show will kick off at 1:00 p.m. ET and it should be interesting as this is new CEO John Ternus’ first rodeo.
Earnings
OK, so we are more or less done with Q2 earnings reporting season. For the season, according to FactSet, the S&P 500 experienced incredible earnings year-over-year growth of 52% on revenue growth of 15.5%. As of Sept. 4, still according to FactSet, for the third quarter, Wall Street now sees an estimated year-over-year earnings growth rate for the S&P 500 of 28.5%, up from 28.2% last week. Wall Street also sees revenue growth of 11.9%, up from 11.7% a week ago.
For the full year of 2026, Wall Street now looks for earnings growth of 31.5%, up from 31.2% last week. This would come on revenue growth of 12%, up from 11.9% a week ago. The outlook for the fourth quarter is also very positive. Fourth quarter S&P 500 earnings growth is now estimated at 26.1% year over year, up from 25.8% last week. At the moment, the energy, technology, and communication services sectors are projected to have grown earnings by 102.5%, 62.6% and 50.7% respectively for the third quarter.
Valuation
Still using data provided by FactSet, the S&P 500 ended last week trading at 19.5-times 12 months’ forward-looking earnings, down from 19.6 times last week and down from 21.6-times more than two months ago. This is back below the five-year average of 19.9 times for the index, but still above its ten-year average of 19 times.
The S&P 500 also ended last week trading at 26.5-times trailing 12 months’ earnings, up from 26.4 times a week ago. This still stands well above the five-year (24.4 times) and ten-year (23.5 times) averages for the index.
Currently, four of the 11 sectors are trading below their five-year average valuations. Six sectors, led by the Industrials (23.5 times) are trading at a premium to their five-year average valuation. One (REITs at 18.2 times) is trading precisely at its five-year average valuation. The four “undervalued” sectors according to their historical averages over five years are the Discretionaries, Technology, the utilities and communication services.
Fed Funds Futures
Fed Funds futures trading in Chicago are now pricing in a 60% probability for a quarter point rate hike to be made to the current target range (3.5% to 3.75) for the Fed Funds Rate at the culmination of the next FOMC policy meeting on Sept. 16. That’s down slightly from a 62% likelihood a week ago at this time. There is now a 54% likelihood priced in for a second quarter point rate hike as soon as Jan. 27, down from 57% a week ago. There are no rate cuts fully priced in at any point in the future looking out toward year’s end 2027, though there is now a minority probability being priced in as early as December of 2027. There is also no third quarter point rate hike priced in at any point in the future.
Economics (All Times Eastern)
06:00 – NFIB Small Biz Optimism Index (Aug): Expecting 99.3, Last 99.8.
08:15 – ADP Employment Change (Weekly): Last 11.75K.
3:00 p.m. – Consumer Credit (July): Last $14.17B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: UNFI (.62)
After the Close: CASY (6.74)
At the time of publication, Guilfoyle had no position in any security mention.
