Will Wall Street confirm its traditional autumn decline this year?

The US stock market is entering the fall after a spectacular performance this year, fueled by an insatiable appetite for artificial intelligence, corporate earnings and expectations of lower interest rates. The S&P 500 index has gained 9.8% year-to-date through the end of August and is up nearly 30% from its April low, which was reached after US President Donald Trump announced trade tariffs on "Emancipation Day.”

Historically, fall has been a turbulent time for markets, with US stocks posting their worst monthly performance on record in September and their most volatile month in October.

Adam Turnquist, chief technical strategist at LPL Financial, said, quoted by MarketWatch: "Financial markets often change their rhythm in September: from the quiet summer months, marked by low trading volumes and low volatility, they enter a period historically associated with seasonal weakness and higher market instability."

• The "September Effect”

Since 1928, the S&P 500 has fallen an average of 1.2% in September, making it the worst month of the year, according to a report published in August by RBC Wealth Management and signed by Vice President Kelly Bogdanova.

"While this is not a major decline in itself - after all, the market can fall that much on a given weak day - the difference is still notable compared to the average performance of other months,” Bogdanova says.

According to the analyst, September returns for the US market have been negative 55% of the time since 1928, significantly higher than the 39% of negative returns for all other months during the same period. Nine of the 40 worst months have been recorded in September, more than in any other month. October, which has its own poor track record, is next, with six of the 40 worst months.

In four of the past five months, September has been even worse, with an average decline of 4.2%. Last year, the index ended the month in the red, but in previous months, declines have ranged from a 3.9% drop in 2020, when the pandemic was in full swing, to a 9.3% drop in 2022, when post-pandemic inflation was already high.

The phenomenon is not unique to the United States. Stocks in Canada, the United Kingdom and Hong Kong - along with markets in other regions - tend to underperform. Since 1970, the S&P/TSX Composite, FTSE All-Share and Hang Seng have all fallen an average of 1.4%, 1.1% and 1.0%, respectively, in September, according to RBC Wealth Management.

• What drives the "September effect”?

Portfolio makeup, loss-making sales and investor psychology are among the elements that lead to the formation of the "September effect” in equity markets, according to RBC Wealth Management Vice President Kelly Bogdanova.

"We believe that the close of the fiscal year for many mutual funds is driving seasonal weakness in the fall. Institutional investors tend to "clean up” their portfolios in September and October, before the close of the fiscal year, selling the worst-performing stocks and sometimes adding exposure to stocks that have outperformed in previous months (...). As they sell, the worst-performing stocks often tend to lag the market or fall further, which can generate volatility and slow the evolution of major stock indices,” the RBC Wealth Management analyst wrote.

In the United States, the federal government's fiscal year does not coincide with the calendar year, but begins on October 1 and ends on September 30 of the following year. However, not all entities use this calendar: companies can choose their own fiscal year, and some US states have different fiscal year-start dates.

Kelly Bogdanova also says: "The fact that September is usually a weak month is not lost on institutional investors who manage hedge funds, mutual funds or pension funds, nor on other investment professionals. The data is well known and discussed for a long time. Perhaps the weakness in September became, at some point, a self-fulfilling prophecy, and previous seasonality generated subsequent seasonality. Some behavioral finance academics have mentioned this as a potential factor.”

However, the RBC Wealth Management analyst points out that fundamentals primarily determine stock performance, not seasonal movements. "September's weak track record should not prompt long-term investors to make major portfolio adjustments. This seasonal and other market cycles are worth respecting, but they should not dominate investment decisions," Bogdanova wrote.

• The bullish case for growth stocks

A number of Wall Street analysts remain bullish on US stocks this year, driven by the appeal of artificial intelligence and the prospect of monetary easing by the Federal Reserve.

Adam Parker, founder and CEO of financial intelligence and services platform Trivector Research, is bullish on the market's performance in September, Investors Business Daily writes.

"We don't expect a weak September. The enthusiasm for artificial intelligence is still there, the Federal Reserve seems to be taking a more relaxed stance, and gross margins can increase for most stocks. It's a bullish three-pronged scenario that's hard to ignore,” he said, quoted by the aforementioned publication, in an article published late last month.

Sam Stovall, chief investment strategist at financial research firm CFRA, points out that there are several sectors of the stock market that have historically outperformed in September. "It's no surprise that defensive sectors - consumer staples, energy, healthcare, utilities and communications services - have held up the best, while cyclical sectors, more exposed to economic fluctuations, have seen the biggest losses,” Stovall said, according to Investors Business Daily.

Adam Parker, founder and CEO of Trivariate Research, who was previously the head of global quantitative research at Morgan Stanley, advocates for top growth stocks, noting that "Big Money” (large institutional investors) can use any correction as an opportunity to increase their holdings.

"Most institutional investors believe that AI-driven productivity will come in 2026 and 2027, so they want to buy solid growth stocks if, one way or another, they correct in September. This makes us believe that, absent a significant change in perspective, stocks will not fall much this year in September, given that the dream of AI productivity is still alive," he said, quoted by the aforementioned publication.

• Fundamentals are more important than seasonal trends

Adam Turnquist of LPL Financial points out that seasonal trends can be a "secondary factor” that affects stock market performance, while other "stronger macroeconomic forces,” such as the state of the U.S. economy and U.S. companies, may ultimately determine future stock performance, according to MarketWatch.

Key events in September that could shape market performance include the August jobs report, which will show whether the labor market slowdown in July is deepening, and the Fed meeting on September 16-17, where it is expected to cut its benchmark interest rate by a quarter of a percentage point to a range of 4% to 4.25%.

While a September rate cut seems highly likely, the major uncertainty remains "whether it will be dovish or hawkish” - which will depend on inflation and employment data released by mid-month, Turnquist tells MarketWatch. "Overall, there is a lot of uncertainty going into September,” the strategist adds.

Turnquist also said the stock market could be overbought in the short term because much of the good news, such as the expectation that the economy will have a soft landing and avoid a recession, already seems priced in. "While that is correct, I wouldn't be surprised to see a reality check to reflect some of the uncertainty that we have to navigate over the next few weeks,” he added.

• Interest Rate Cuts, Recessions, and the Stock Market

Angelo Kourkafas, chief investment strategist at Edward Jones Investments, says that historically, Federal Reserve interest rate cuts tend to support the stock market when the economy is not in a recession, and current conditions suggest we are on the right track.

"Revised second-quarter GDP data confirmed that the U.S. economy remains robust, growing at an annualized rate of 3.3% after contracting 0.5% in the first quarter,” the strategist wrote in his latest weekly analysis.

Kourkafas points out that financial conditions are currently looser than they were a year ago and easier than when the Fed began its rate hike cycle in 2022. "With the Fed expected to gradually reduce its policy rate through 2026, further easing could continue to support the economy and financial markets,” wrote the Edward Jones Investments analyst.

From an investment perspective, this environment could fuel an extended rally, with upside opportunities for small- and mid-cap stocks, value stocks, and cyclical sectors.

"As the summer winds down, the market remains solid, supported by the positive effects of AI, rising corporate profits and expectations of a more accommodative Federal Reserve. We believe the outlook for equities remains positive over the next twelve months. However, we cannot yet say that volatility has completely disappeared. Historically, the next two months have been seasonally difficult for equities, often marked by wider daily swings and more modest returns. The bright side: these seasonal difficulties tend to be temporary, and markets typically bounce back in strength in the months that follow,” said Kourkafas.

• Trade Tariffs and Corporate Profitability

There are, however, several elements that could disrupt the market in September, says Terry Sandven, chief equity strategist at US Bank Asset Management, according to Investors Business Daily.

The analyst says that strategies to mitigate the effects of trade tariffs "are still in the works” and that uncertainty persists about "how and whether suppliers, companies or consumers will ultimately bear the bulk of the tariff costs.” Corporate profitability may be affected by this situation, and upward or downward revisions to earnings estimates could lead to adjustments in stock prices.