As Q2 earnings season concludes, we move into what’s historically been a weaker month for stocks. While economic data continues to show soft momentum, the prospect of monetary easing has shored up confidence and lifted many major global equity markets. Elsewhere, renewed questions about the sustainability of public finances across several major economies have been exerting upward pressure on long-term bond yields. We discuss more below.

 

September seasonality

Since 1928, September has been the S&P 500’s weakest month, with an average monthly decline of 1.2%, underperforming all other months. September returns were also negative 55% of the time over this period. Similar seasonal patterns are also seen in the U.K. and Canadian markets. Given this historical seasonality and with earnings catalysts largely behind us, market participants are likely to turn their attention towards economic data, monetary policy signals, and policy developments out of the White House. Beyond short-term seasonality, however, corporate earnings fundamentals continue to look solid and remain the long-term foundation for equity markets.

 

Watching the U.S. data

Signs of continued softening in the U.S. labour market have pulled forward market expectations for a Federal Reserve rate cut to as early as this month. July’s underwhelming jobs report was accompanied by large downward revisions to the prior two months’ figures. At the same time, inflation remains above the Fed’s 2% target, with some indicators suggesting that price pressures could flare up again. The backdrop means Fed policymakers will need to navigate a delicate balancing act between supporting growth and price stability. Growing optimism for monetary easing has helped bolster equity markets since the Fed’s Jackson Hole symposium in late August, making upcoming jobs and inflation data crucial in shaping the outlook for interest rates.

 

Bond markets

While short-term Treasury yields in the U.S. have fallen on rate cut expectations, long-term yields have risen, resulting in a “steepening” of the yield curve. Several factors have likely contributed to this dynamic, including concerns around the U.S. budget deficit and the Trump administration’s rhetoric that raised questions around central bank independence.

But higher long-term bond yields have been a global phenomenon, with 30-year government bond yields in several major developed nations (U.K., Germany, France, Japan) recently reaching their highest levels in over a decade. A common thread behind the upward pressure on long-term yields is elevated budget deficits, as many governments face increasingly complex fiscal tradeoffs, balancing political priorities, defense spending, and industrial policy for strategically important industries with the need for fiscal restraint to maintain credibility in public finances and investor confidence.

 

Takeaway

Resilient corporate earnings and optimism over potential Fed rate cuts have helped support global equity markets, allowing them to extend gains despite a tepid economic growth environment. But with September’s historical tendency towards weakness and valuations that appear to reflect an upbeat outlook, we believe “invested, but watchful” remains a sensible posture for portfolios as we continue to monitor economic data, earnings trends and global bond yields.