A Black September for U.S. Stocks? Except for the Fed Rate Cut

TradingKey - Starting around the historically strong “July rally,” Wall Street analysts have increasingly voiced concerns about a weak third quarter for U.S. equities — citing the so-called “dangerous August” and the “September curse.” Yet in reality, risk appetite has outweighed valuation concerns, and September is set to receive a powerful boost: Federal Reserve rate cuts that could override seasonal trends.

Since the April “Liberation Day” market plunge, the S&P 500 has rallied about 30%, raising growing concerns about the sustainability of this rebound. 

After navigating an expectedly volatile August with a modest 1.91% gain, the approach of September — traditionally the worst-performing month for U.S. stocks — has triggered deeper investor anxiety, especially amid ongoing market disruptions from tariffs and fiscal uncertainty.

According to Bank of America, since 1927, the S&P 500 has declined in over half of Septembers, with an average drop of 1.17%. In the first year of a new presidential term, the index has fallen 58% of the time, with an average decline of 1.62%.

However, the prospect of imminent Fed rate cuts — and potentially a series of cuts — could rewrite September’s historical script. Bloomberg analyst Nathaniel Welnhofer said expectations of a Fed rate cut later this month could help the market “defy the odds.” When the Fed cuts rates outside of a recession, September returns tend to be stronger.

Welnhofer found that since 1971, the S&P 500 has averaged a 1% decline in September. But when the Fed cut rates without a contracting economy, the index averaged a 1.2% gain.

Last September was the most recent example of this counter-seasonal trend: the Fed launched its post-pandemic easing cycle with an unexpected 50-basis-point cut, and the S&P 500 rose 2% that month. Similar patterns occurred in 2019, 2007, and 1995.

Barclays, analyzing data from the past two decades, found that if you exclude the market crashes of 2008 (financial crisis) and 2022 (monetary tightening), the S&P 500 has actually averaged a 0.3% gain in September — not the commonly cited 0.65% loss.

The bank argues that while downside risks exist, the bearish view based purely on seasonality may be overstated.

Jason Tang, Senior Economist at TradingKey, said rate cuts are theoretically bullish for equities, as they lower corporate borrowing costs, increase market liquidity, stimulate economic activity, lift asset valuations, and boost investor confidence.

Jason believes that although stock valuations remain elevated, historical correlations between rate cuts and equity performance — combined with ongoing U.S. tax cuts — suggest the S&P 500 will continue its upward trend over the next 12 months.