September Starts with a Familiar Tone

While the birthstone for September is blue sapphire, investors saw a lot of red on their stock screens to start the month. If history is any guide, it’s business as usual.

Dust off your copy of the “Stock Trader’s Almanac,” and it will tell you that September has historically been the worst month of the year for the S&P 500, NASDAQ, Russell 2000 and Dow Industrials.

After the attention-getting pullback in early August, which was driven by economic growth concerns, greater tech earning scrutiny, the unwinding of the carry trade and systemic funds selling pressure, the S&P 500 rebounded and finished August with a greater than 2% monthly gain.

Renewed growth fears led major indices to start this month with their steepest weekly declines in more than a year. Despite the recent drops, crucial price levels have not been breached, and good news outweighs the bad.

Importantly, corporate earnings continued to be positive.

Charts 1 & 2, 1:13— After a strong earnings season, focus turns to the third quarter. Second-quarter S&P 500 earnings grew by 10.9%, the strongest since the fourth quarter of 2021 and 2.4% above expectations.

Although the share of companies lowering guidance for the third quarter was above historical averages, the number of companies issuing negative guidance was the lowest since the fourth quarter of 2022.

Importantly, breadth in earnings estimates continues to improve as many sector estimates are now higher than they were midyear. City National Rochdale expects 2024 corporate profit growth to be between 9% and 12% and 2025 growth between 8% and 12%.

Let’s shift to politics.

The respective conventions are in the rearview mirror, and we’ve had our first presidential debate. We’re less than two months away from November 5. The elections will surely increasingly dominate the headlines, much ink will be spilled, and the chatter will be borderline deafening.

But does the stock market really care who controls the White House and Congress?

Chart 3, 2:26— Looking back 90+ years, S&P 500 returns have been positive with all combinations. If one dug deeper into each of these scenarios, it’s likely one would find that economic fundamentals, corporate earnings and interest rate trends mattered more than the donkey or the elephant.

In other words, market performance doesn’t strongly correlate with government control, and any sector benefits from the elected candidate are usually temporary.

Chart 4, 2:55— At the moment, the election is too close to call. The upcoming tight presidential and congressional races may increase market volatility. A divided government remains the most likely outcome, limiting significant policy shifts. Tariffs, taxes and treasuries are key areas of focus.

There’s still a ways to go –to sum up our current macro view, the global economic outlook is stable. U.S. growth is strong but moderating. Cooling inflation is paving the way for a Federal Reserve easing cycle. Job and income growth are supporting consumer spending. Lower interest rates should support a pickup in business investment. Elevated equity valuations in some sectors reflect strong corporate profits. Geopolitical events remain a key risk to the outlook. Our equity strategy emphasizes quality, market competitiveness and financial robustness.

We recommend an overweight in semiconductor, financial and healthcare sectors, and an underweight in real estate and materials.