Should You Buy the S&P 500 Index Before Sept. 17?

Key Points

• The Fed will conclude its September meeting with a decision on whether to lower interest rates and, if so, by how much.

• The market sees an extremely high likelihood of a September cut.

• Lower interest rates tend to be supportive of the market, but there are other forces at work.

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After months of anticipation, the Federal Reserve's September meeting is on the market's doorstep. The interest rate-setting Federal Open Market Committee (FOMC) will begin its September meeting on Tuesday, Sept. 16, and conclude on Sept. 17, with a decision regarding the Fed's benchmark federal funds rate. Will it leave the rate unchanged, raise it, or lower its range? If it lowers the rate, it must decide by how much. The market is currently pricing in a very high likelihood of a cut in the prime overnight lending rate (as of Sept. 8).

Lower interest rates tend to be supportive of companies that need to borrow money to operate, and that tends to excite stock traders, leading to higher stock prices. In anticipation of this increased enthusiasm, should investors buy the broader benchmark S&P 500 (SNPINDEX: ^GSPC) before Sept. 17?

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The Fed is expected to cut rates

The market has been back and forth for months regarding whether the Fed will lower interest rates in September. As recently as June, traders betting on future changes to the federal funds rate only placed a 50% to 60% chance of a rate cut in September. As of this writing, the market is pretty much 100% sure of a cut, with about 88% expecting a quarter-point drop and about 12% expecting the Fed will cut the rate by a half point.

The Fed's dual mandate is to maintain stable prices and promote maximum employment. But these two goals can sometimes be at odds with one another. Right now, for instance, the unemployment rate remains fairly low even as inflation is inching up well above the Fed's preferred 2% target.

President Donald Trump's constantly changing tariffs complicate the situation even further. Nearly all economists believe outsized tariffs will result in outsized inflation (especially in the short term), but it's tough to know exactly how things will play out long-term. There's certainly been evidence of wholesale inflation building, which will eventually trickle down to consumers.

At the Federal Reserve's mid-August Jackson Hole symposium, Fed Chair Jerome Powell said the Fed is considering an adjustment to its policy stance. That sent markets into a furious rally, as investors got optimistic about a September cut. The Fed wants to protect the labor market and not let unemployment rise too much. At the same time, it wants the trajectory of inflation to continue downward. The Fed wants to avoid a stagflationary scenario at all costs, in which unemployment rises and consumer prices and inflation expectations remain elevated.

Recently, the August non-farm payrolls report came in weaker than expected, with the economy adding 22,000 jobs, well below the 75,000 expected. Totals for the previous two months were also revised sharply downward. The unemployment rate rose to 4.3%, although average hourly earnings rose 0.3% from the prior month, as expected. The report points to a weakening labor market, which should give the Fed the go-ahead to cut interest rates in September to potentially help encourage more companies to hire. It may also prompt a debate over whether the Fed should cut by a half point.

However, there are still a few more data points before the Fed's meeting, including the closely watched Consumer Price Index (CPI), which tracks price changes on a market basket of consumer prices, and the Producer Price Index (PPI), a measure of wholesale inflation.

Last month, the CPI came in slightly better than expected, although core inflation, which strips out more volatile food and gas prices, came in at 3.1% higher year over year. However, it was the July PPI that really set investors off, rising 0.9% from the prior month, much higher than expected, and the highest monthly increase in three years. Rising inflation can indicate the economy is overheated, with demand outstripping supply, causing prices to rise. However, rising prices can also be influenced by things like tariff policy.

It's not all about September

Given the August jobs report, it would take something extraordinary for the Fed not to agree to a September cut. At this point, I think investors should be more concerned about the forward curve past September. As of this writing, the market is forecasting six rate cuts between now and the end of 2026. That's an indication of a slowing economy.

Regardless of what the Fed does in September, if the data continues to show boiling inflation, the Fed may not cut rates as much as expected. The market will be watching very closely, and it tends to know if the Fed is cutting rates for the wrong reasons. Additionally, pay attention to Powell's press conference following the conclusion of the Fed's meeting. He will likely provide clues into how the Fed views the economy after all the new data points this month.

Long-term investors should, of course, feel comfortable buying into the S&P 500 before Sept. 17 because a long-term investment won't care all that much about short-term fluctuations in the market. This is especially true if they are practicing dollar-cost averaging, which will smooth out their cost basis over time.

But I do not recommend trying to trade using just the Fed meeting as the impetus. For one thing, short-term traders are already buying in and boosting the market in anticipation of the meeting, and will likely sell on the news. I don't recommend that type of short-term wagering as it is too difficult to win at.

Several different scenarios could play out, and investors simply cannot predict how investors will react. Additionally, a handful of fast-growing tech stocks expected to benefit from the artificial intelligence revolution consume a large portion of the S&P 500. If the number of expected rate cuts between now and the end of 2026 declines, those stocks -- and therefore the broader market -- could take a near-term hit.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.