Investor focus turns to data, election, earnings after US Fed rate cut move

A roaring rally in US stocks will face a gauntlet of economic data, looming political uncertainty and a corporate earnings test in coming weeks as investors navigate one of the most volatile periods of the year for equity markets.

The benchmark S&P 500 this week hit its first closing all-time high in two months after the Federal Reserve unveiled a hefty 50-basis point rate cut, kicking off the first US monetary easing cycle since 2020.

The index is up 0.8% so far in September, historically the weakest month for stocks, and has gained 19% year-to-date. But the rocky period could carry over until the Nov 5 election, strategists said, leaving the S&P 500 vulnerable to market swings.

“We’re entering that period where seasonality has been a bit less favorable,” said Angelo Kourkafas, senior investment strategist at Edward Jones. “Despite the excitement about the start of the new rate-cutting cycle, it could still be a bumpy road ahead.”

The second half of September is historically the weakest two-week period of the year for the S&P 500, according to a Ned Davis Research analysis of data since 1950.

The index has also logged an average 0.45% decline in October during presidential years, data from CFRA going back to 1945 showed.

Volatility also tends to pick up in October in election years, with the Cboe Market Volatility index rising to an average level of 25 at the start of the month, as opposed to its long-term average of 19.2, according to an Edward Jones analysis of the past eight presidential election years. The VIX was recently at 16.4.

The market could be particularly sensitive to this year’s close election between Republican Donald Trump and Democrat Kamala Harris. Recent polls show a virtually tied race.

“Unless the data deteriorates considerably, we think US. elections will start to be more at the forefront,” UBS equity derivative strategists said in a note.

Investors are also looking for data to support expectations that the economy is navigating a “soft landing,” during which inflation moderates without badly hurting growth. Stocks fare much better after the start of rate cuts in such a scenario, as opposed to when the Fed cuts during recessions.

The coming week includes reports on manufacturing, consumer confidence and durable goods, as well as the personal consumption expenditures price index, a key inflation measure.

Attention will be squarely on employment after Fed Chair Jerome Powell said the central bank wanted to stay ahead of any weakening in the job market as the Fed announced its cut this week. The closely-watched monthly U.S. jobs report is due on Oct 4.

“We’re going to have hyper-focus on anything that speaks to the strength of the labor force,” said Art Hogan, chief market strategist at B Riley Wealth.

Meanwhile, the rally in stocks has pushed up valuations. The S&P 500 has a price-to-earnings ratio of 21.4 times expected 12-month earnings, well above its long-term average of 15.7, according to LSEG Datastream.

With the scope for valuations to go higher now more limited, investors said that puts a greater burden on corporate earnings to be strong in order to support stock gains.

Third-quarter reporting season kicks off next month. S&P 500 earnings for the period are expected to have climbed 5.4% from the prior year, and then jump nearly 13% in the fourth quarter, according to LSEG IBES.

FedEx shares tumbled on Friday after the delivery giant reported a steep quarterly profit drop and lowered its full-year revenue forecast.

“Extended multiples put pressure on macro data and fundamentals to support S&P 500 prices,” Scott Chronert, head of U.S. equity strategy at Citi, said in a report.

he Federal Reserve gave home shoppers what they hoped for this week: a big rate cut and a signal of more cuts to come.

Even so, aspiring homebuyers and homeowners eager to refinance should temper their expectations of a big drop in mortgage rates from here.

While the Fed doesn’t set mortgage rates, its policy pivot does clear a path for mortgage rates to go lower. But in this case, the Fed’s action was widely anticipated, so rates moved lower well before the cut was even announced.

“We’ve seen the bulk of the easing that we’re going to get already this year,” said Danielle Hale, chief economist at Realtor.com. “I wouldn’t be entirely surprised if mortgage rates ticked up a bit from here before declining again.”

When mortgage rates rise, they can add hundreds of dollars a month in costs for borrowers. The average rate on a 30-year mortgage rose from below 3% in September 2021 to a 23-year high of 7.8% last October. That coincided with the Fed jacking up its benchmark interest rate to fight inflation.

Agencies