NEW YORK – The next few weeks will give Wall Street a clear reading on whether this latest stock market rally will continue – or if it is doomed to get derailed.
Jobs reports, a key inflation reading and the US Federal Reserve’s interest rate decision will all hit over the next 14 trading sessions, setting the tone for investors.
The events arrive with the stock market seemingly at a crossroads after the S&P 500 Index just posted its weakest monthly gain since March and heads into September, historically its worst month of the year.
At the same time, volatility has vanished, with the Cboe Volatility Index, or VIX, trading above the key 20 level just once since the end of June.
The S&P 500 has not suffered a 2 per cent sell-off in 91 sessions, its longest stretch since July 2024.
It touched another all-time high at 6,501.58 on Aug 28, and is up 9.8 per cent for the year after soaring 30 per cent since its April 8 low.
“Investors are assuming correctly to be cautious in September,” said Mr Thomas Lee, head of research at Fundstrat Global Advisors. “The Fed is re-embarking on a dovish cutting cycle after a long pause. This makes it tricky for traders to position.”
The long-time stock market bull sees the S&P 500 losing 5 per cent to 10 per cent in autumn before rebounding to between 6,800 and 7,000 by year-end.
Mr Lee is not alone in his near-term scepticism. Some of Wall Street’s biggest optimists are growing concerned that the eerie calm is sending a contrarian signal in the face of seasonal weakness.
The S&P 500 has lost 0.7 per cent on average in September over the past three decades, and it has posted a monthly decline in four of the last five years, according to data compiled by Bloomberg.
The problem is, this kind of tranquillity and extreme positioning has historically foreshadowed a spike in turbulence.
That is what happened in February, when the S&P 500 peaked and volatility jumped on worries about President Donald Trump’s tariff plans, which caught pro traders offside after coming into 2025 betting that volatility would stay low.
Traders also shorted the VIX at extreme levels in July 2024, before the unwinding of the yen carry trade upended global markets that August.
The VIX climbed towards 16 on Aug 29 after touching its lowest levels of 2025, but Wall Street’s chief fear gauge still remains 19 per cent below its one-year average.
Of course, there are fundamental reasons for the S&P 500’s rally.
The economy has stayed relatively resilient in the face of Mr Trump’s tariffs, while corporate America’s profit growth remains strong.
That has left investors the most bullish on US stocks since they peaked in February, with cash levels historically low at 3.9 per cent, according to Bank of America’s latest global fund manager survey.
But here is the circular problem: As the S&P 500 climbs higher, investors become increasingly concerned that it is overvalued.
The index trades at 22 times analysts’ average earnings forecast for the next 12 months.
Since 1990, the market has been only more expensive at the height of the dot.com bubble and the technology euphoria coming out of the depths of the Covid-19 pandemic in 2020.
“We’re buyers of big tech,” said Ms Tatyana Bunich, president and founder of Financial 1 Tax. “But those shares are very pricey right now, so we’re holding some cash on the sidelines and waiting for any decent pullback before we add more to that position.”
Dr Ed Yardeni of the eponymous firm Yardeni Research, another well-known bull, is questioning whether the Fed will even cut rates in September, which would hit the stock market hard, at least temporarily.
His reason? Inflation remains a persistent risk.
“I expect this stock rally to stall soon,” Dr Yardeni said. “The market is discounting a lot of happy news, so if CPI (consumer price index) is hot and there’s a strong jobs report, traders suddenly may conclude rate cuts aren’t necessarily a done deal, which may lead to a brief sell-off.
“But stocks will recover once traders realise the Fed can’t cut rates by much because of a good reason: The economy is still strong.” BLOOMBERG
