September 2023: Stock Market Forecast

The 2023 stock market surge paused in August as investors considered if the newest set of economic data would force the Federal Reserve to release at least one more interest rate hike before the end of the year.

The S&P 500 fell 1.4% in August, reducing its year-to-date gains to 18.8%. Investors were put off by remarks made by Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium, which suggested that more monetary policy tightening was on the way.

Meanwhile, second-quarter earnings results have been mixed as corporations continue to grapple with growing expenses and the potential of a U.S. economic slowdown.

In the dynamic realm of finance, investors closely scrutinize stock market forecasts to navigate uncertainties and optimize their portfolios. Accurate stock market forecasts leverage historical data, economic indicators, and advanced analytics to predict potential trends. Investors rely on these insights to make informed decisions, mitigate risks, and capitalize on opportunities. A comprehensive stock market forecast considers factors like global economic conditions, geopolitical events, and emerging technologies. While forecasts offer valuable insights, they are inherently speculative, and market conditions can evolve rapidly. Engaging with reputable financial experts and staying informed is crucial for investors seeking to navigate the unpredictable terrain of the stock market.

Interest Rates Headed Higher?

In September, inflation, interest rates, and the labor situation are likely to dominate Wall Street headlines.

The consumer price index increased 3.2% year on year in July, down from a peak of 9.1% in June 2022 and below economists’ expectations of a 3.3% increase. For the second month in a row, the headline CPI rose by only 0.2% month on month.

Powell said in his annual speech in Jackson Hole in August that inflation is still “too high” and that “we are prepared to raise rates further.” Powell also stated that the Fed will be able to “proceed carefully” at future meetings due to decelerating inflation and a strong economy. 

The Federal Open Market Committee (FOMC) hiked interest rates by another 25 basis points (bps) during its most recent meeting in July, to a new goal range of between 5.25% and 5.5%, its highest target range in 22 years. Economists predict the FOMC to keep interest rates unchanged at its next meeting, which concludes on September 20.

According to Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, each month that inflation falls below expectations raises the possibility that the Fed has made its final rate hike of the current cycle.

“The Fed is not only unlikely to raise rates at the next meeting; they are also unlikely to raise rates again this year as long as inflation remains contained.” According to Zaccarelli.

“Investors still care what the Fed is going to do, but at this point given that they are either done raising rates or very close to being done raising rates, the underlying fundamentals of corporate profits are again the main focus.” The bond market is pricing in a 44.4% chance the FOMC will raise rates by at least another 25 bps by November. The market is also pricing in a 59.5% chance the FOMC will cut interest rates from their current levels by May 2024.

U.S. Recession Watch

In August, the Fed received conflicting signals in its efforts to navigate a “soft landing” for the US economy. Aside from CPI inflation falling short of predictions, the personal consumption expenditures (PCE) price index rose 3.3% year on year in July, up from 3% in June. Core PCE inflation, which excludes volatile food and energy costs and is the Fed’s preferred inflation measure, rose 4.2% in July, matching economist expectations but remaining considerably above the FOMC’s 2% long-term target.

As prices continue to increase, the hot labor market in the United States appears to be cooling. The Labor Department said that the US economy added 187,000 jobs in July, falling short of economist expectations of 200,000. June and July were the first months in which the United States added fewer than 200,000 jobs in a row since the COVID-19 pandemic lockdowns in March and April of 2020.

The unemployment rate in the United States reached 0.7 in July, the highest level since September 2021. However, the unemployment rate in the United States remains at 3.5%. Powell stated in his Jackson Hole address that returning inflation to 2% will most likely necessitate “some softening in labor market conditions.”

The FOMC may find it difficult to justify a pause in interest rate hikes until the labor market cools further. The higher the Fed is obliged to raise interest rates to manage inflation, the greater the likelihood of economic damage later on.

This danger is reflected in the New York Fed’s U.S. recession probability index, which still forecasts a 66% chance of a recession within the next year. While FOMC policymakers are no longer predicting a recession, the most recent Federal Reserve economic predictions from June indicate a steep reduction in US GDP growth in the second half of 2023 and into 2024.

Earnings Slowdown

Even if the United States avoids a recession, the S&P 500’s remarkable climb in 2023 is not supported by underlying economic fundamentals. In the second quarter, S&P 500 firms recorded their third straight quarter of negative year-over-year earnings growth. Meanwhile, the S&P 500’s forward price-to-earnings ratio has crept up to 19.2, over 10% higher than the 10-year average of 17.4.

Earnings for the S&P 500 fell 5.2% year on year in the second quarter, the market’s worst dip since the third quarter of 2020.

Energy has been the most significant drag on S&P 500 earnings, with a 51.4% reduction in profits in the second quarter on extraordinarily adverse 2022 comparisons. The Ukraine conflict and global commodities inflation drove up energy prices in 2022, allowing several oil and gas companies to post record profits last year.

For the time being, experts expect S&P 500 earnings growth to return to positive territory in the second half of 2023. Analysts predict that S&P 500 earnings will rise 0.2% year on year in the third quarter and 7.6% in the fourth quarter.
However, DataTrek Research co-founder Nicholas Colas claims that analyst earnings projections have recently been heading in the incorrect direction.

How to Invest in August

The market’s poor performance in August was disappointing for investors, but September has historically been the worst month of the year for the US stock market. The S&P 500 has averaged a 1.1% fall in September since 1928, the poorest performance of any month of the year by a full 1% margin.

According to Richard Saperstein, chief investment officer at Treasury Partners, stock market volatility will persist in September as investors price in the possibility of an economic downturn.

“Our message to investors is to keep their equity exposure intact, with overweights in large-cap technology and oil stocks.” “At current levels, municipal bonds present appealing alternative opportunities,” Saperstein adds.

Investors concerned about the US economy’s outlook can take a protective stance in September by lowering their equity exposure. Rising interest rates on high-yield savings accounts have been one of the silver linings of the Fed’s tightening cycle. Currently, investors can earn 5% interest on select high-yield savings accounts that are FDIC-insured, making them virtually risk-free.

When interest rates are high, value equities historically beat growth companies. High interest rates have a detrimental influence on discounted cash flow valuations, which can harm high-growth stocks. Vanguard Value ETF (VTV), Vanguard Small Cap Value ETF (VBR), and iShares MSCI EAFE Value ETF (EFV) are all popular value-oriented exchange-traded funds.

Conclusion

Furthermore, certain stock market sectors are seen as more defensive than others since they generate generally consistent earnings and cash flows regardless of the economic cycle. Utility companies, consumer staples stocks, and healthcare equities are often considered conservative assets that may be reasonably sheltered if economic growth slows to a crawl. Energy (11.9) and Financial (13.9) are the market sectors with the lowest forward PE ratios at the moment.

Frequently Asked Questions:

What is the current outlook for the US stock market in September 2023?

The outlook for the US stock market in September 2023 is influenced by various factors, including economic indicators, corporate earnings, and geopolitical events. It’s important to monitor the latest news and analysis from financial experts for the most up-to-date forecasts.

How have recent economic trends impacted the US stock market forecast for September 2023?

Recent economic trends, such as inflation rates, employment data, and interest rate decisions, can have a significant impact on the stock market. Understanding how these trends are affecting market sentiment is crucial for forecasting.

What sectors or industries are expected to perform well in September 2023?

Stock market forecasts often highlight sectors or industries that are expected to outperform based on economic conditions and market trends. Identifying these sectors can be valuable for investors.

What are the potential risks and challenges facing the US stock market in September 2023?

It’s important to be aware of potential risks, such as geopolitical tensions, policy changes, or economic uncertainties, that could impact the stock market negatively.

What is the expected direction of the stock market in September 2023?

The expected direction of the stock market in September 2023 is uncertain. Some analysts believe that the market will continue to rise, while others believe that it will fall. The direction of the market will depend on several factors, including the state of the economy, the Federal Reserve’s monetary policy, and investor sentiment.


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