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While the third quarter is ending with the S&P 500 Index on track for another advance, the mood seemed to shift, however slightly, at the end of last week. The equity benchmark fell three straight days — hardly alarming, but still the longest slump in a month — before pushing higher Friday. It’s up less than 1% since the Federal Reserve’s rate cut Sept. 17, and the weakness has been broad-based, with Big Tech sliding along with consumer stocks, materials producers and health-care companies.
Positioning data, though, suggest investors are leaning into bets for a year-end rally. Volatility remains well below its long-term average, and derivatives markets show traders paying more to protect against a melt-up than a downturn.
Unsurprisingly, it’s a setup that has Wall Street veterans cautioning against enthusiasm for risk assets. There are reasons to worry. President Donald Trump just reminded investors that his favorite economic policy tool remains sharpened, slapping levies on imported furniture, brand-name drugs and heavy trucks just as the effects of the first tariff wave are expected to show up in earnings. JPMorgan Chase & Co. will start the reporting season Oct. 14, and expectations for profit growth are high.
The blitz of earnings is part of a five-week stretch that brings information crucial to the bull market’s longevity. Hiring data due Friday will give clues on the labor market after signs of weakness prompted the first Fed rate cut in a year. The central bank’s next policy decision is due Oct. 29, with traders torn on the likelihood of a reduction after unexpectedly strong data on consumer spending.
Markets have so far ignored any threat from a potential government shutdown on Oct. 1, though that risk is growing larger by the day. Then there is October’s reputation as the most volatile month for US equities.
“I wouldn’t be surprised to see stocks pull back soon and volatility creep higher in October, given stretched equity valuations after such a stellar run for stocks in recent months,” said RaeAnn Mitrione, investment management partner at Callan Family Office. “It’s unlikely that stock gains can continue at this pace in the fourth quarter.”
