Fed Rate Decision Comes as the Stock Market Enters Its Worst Period. What’s Next for the Rally.

Markets are riding high into Wednesday’s crucial Fed rate decision. What happens next is by no means assured. (Courtesy NYSE)

This week’s Federal Reserve interest-rate decision dovetails with what is traditionally the worst period of the year for U.S. stocks, raising the stakes for the market’s record-setting rally into the final months of the year.

Bank of America analysts noted in a report published Monday that the final 10 trading days of September, which start Wednesday, are historically the weakest of the year. Citing data going back to 1928, the 10-day block has delivered an average return of -1.1% for the S&P 500 , with a median decline of -0.66%. In the first year of a new administration in the White House, the average return for the benchmark is even worse, at -1.58%, over the final 10 trading days of the month.

That could be a concern for investors with stocks now testing their 26th record high of the year, and traders pricing in the near certainty of a quarter-point interest-rate cut from the Fed when it wraps up its two-day policy meeting on Wednesday. Bets on follow-on reductions in October and December are also fully baked into interest-rate markets.

“We have been suggesting for some time that the market might not positively reward an interest rate cut at this point, given it is likely only coming as a sign the economy is slowing,” said Adam Parker, founder and CEO at Trivariate Research.

Recent market reaction to rate cuts is also a cause for concern. The S&P 500 was down six months after the Fed’s first rate cut in September of 2024, and fell over the six months after its follow-on cuts in November and December of the same year.

Doug Ramsey, chief investment officer at Leuthold Group, notes that Fed rate cuts that occur when the S&P 500 is within 1% of its all-time high tend to trigger pullbacks.

“Among the 35 cuts in the federal funds rate since 1996, only six occurred with the S&P 500 within 1% of an all-time high,” he said in a recent note. “In this history, the average drawdown from the index’s one-year high at the time of any Fed cut is 15.3%.”

Brian Buetel, managing director at UBS Wealth Management in Boca Raton, Fla., sees it differently.

“There’s no denying the fact that September has often been a weak month for the stock market, but investors who are under-allocated or looking to add to their stock exposure could utilize market pullbacks and increase their exposure,” he said.

“We expect the bull market continuing to gain steam into 2026, as investors have plenty of earnings momentum runway to work with,” Buetel added in remarks emailed to Barron’s.

Earnings have remained a key plank in the market’s ongoing rally, with double-digit percentage growth recorded over the first two quarters of the year.

Analysts expect a full-year growth rate of around 10%, according to LSEG forecasts, with another 13.7% gain priced in for 2026.

That’s a concern for Lisa Shalett, head of the global investment office at Morgan Stanley Wealth Management. She argues that U.S. stocks are “increasingly pricing perfection based largely on assumptions around GenAI spending, profit margin improvement and enough of a ‘bad news is good news’ narrative” to continue justifying Fed rate cuts.

“With valuations rich, room for disappointment is very limited,” she said in a note published Monday.

Some of that bad news narrative, at least on the economic front, is likely to come from the labor market, where jobs growth is slowing sharply.

But that doesn’t have to slow the current rally, argues David Waddell, CEO and chief investment strategist at wealth management firm Waddell & Associates.

“Given that the stock market uses earnings data and prevailing interest rates to calculate value, weak job growth does not imply weak stock market performance,” he added.

Write to Martin Baccardax at martin.baccardax@barrons.com