Investors focus on data, elections and earnings after Fed cuts interest rates

By Lewis Krauskopf

NEW YORK (Reuters) – A surge in U.S. shares will face a storm of economic data, looming political uncertainty and a test of corporate profits in coming weeks as investors navigate one of the most volatile periods of the year for stock markets.

The S&P 500 hit its first closing high in two months this week after the Federal Reserve announced a significant 50 basis point interest rate cut, kicking off the first round of U.S. monetary easing since 2020.

The index rose 0.8% in September, historically the weakest month for stocks, and has gained 19% since the beginning of the year. But the turbulent period could extend into the Nov. 5 election, strategists said, leaving the S&P 500 vulnerable to market volatility.

“We’re entering a period where seasonality has been a little less favorable,” said Angelo Kourkafas, senior investment strategist at Edward Jones. “Despite the excitement of the start of a new rate-cutting cycle, the road ahead could still be bumpy.”

The second half of September is historically the weakest two-week period of the year for the S&P 500, according to an analysis of data going back to 1950 by Ned Davis Research.

The index also averaged a 0.45% decline in October during presidential election years, according to CFRA data going back to 1945.

Volatility also tends to rise in October in election years, with the Cboe Market Volatility Index rising to an average of 25 at the start of the month, as opposed to the long-term average of 19.2, according to Edward Jones’ analysis of the past eight years of presidential elections. The VIX was last at 16.4.

The market may be particularly sensitive to this year’s close election between Republican Donald Trump and Democrat Kamala Harris, with recent polls showing a near tie.

“If the data does not deteriorate significantly, we believe the US election will start to move more into the forefront,” UBS equity derivatives strategists said in a note.

Investors are also looking for data that confirms expectations that the economy is going through a “soft landing,” in which inflation moderates without seriously hurting growth. Stocks tend to do much better when interest rates begin to fall in such a scenario, as opposed to when the Fed cuts in the middle of a recession. The coming week includes reports on manufacturing, consumer confidence and durable goods, as well as the consumer price index, a key indicator of inflation.

Attention will be focused on hiring after Fed Chair Jerome Powell said the central bank wanted to get ahead of any weakness in the labor market when the Fed announced a cut this week. The closely watched monthly U.S. jobs report is due Oct. 4. “We’re going to be focused on anything that shows the strength of the labor force,” said Art Hogan, chief market strategist at B Riley Wealth. Meanwhile, the rally in stocks has lifted valuations. The S&P 500 has a price-to-earnings ratio of 21.4 times expected 12-month earnings, well above its long-term average of 15.7, according to LSEG Datastream. With the scope for higher valuations now more limited, investors said that puts more pressure on corporate earnings to be strong to support stocks’ gains. The third-quarter reporting season begins next month. S&P 500 earnings for the period are expected to rise 5.4% from a year earlier, then jump nearly 13% in the fourth quarter, according to LSEG IBES. FedEx shares fell Friday after the delivery giant reported a sharp quarterly profit decline and lowered its full-year revenue forecast. “Extended multiples are putting pressure on macro data and fundamentals to support S&P 500 prices,” Scott Chronert, head of U.S. equities strategy at Citi, said in a report.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Nick Zieminski)