A Shutdown Could Pause Wall Street’s Rally. But the Breather Will Be Short.

Wall Street is keying on a government shutdown being a risk to the S&P 500’s extraordinary rally. (NYSE)

Key Points

• The S&P 500 has risen over 33% since April, reaching record highs, but concerns about overvalued companies are growing.
• A looming government shutdown could cause a market pullback due to data delays and job loss risks.
• Gold prices have rallied, with bullion reaching a new record peak and extending its 2025 advance to approximately 48%.

Stocks have been on a massive run since the early April nadir that followed President Donald Trump’s announcement of tariffs on trading partners, with the S&P 500 rising more than 33% to a series of record highs but also growing concerns over excessively valued companies.

That could leave stocks vulnerable to a pullback tied, at least in part, to the looming government shutdown as investors look to take some air out of the early autumn rally and regroup to drive markets higher into the end of the year.

The president, as well as senior Republican lawmakers, appeared content to allow the shutdown to go ahead at 12:01 a.m. Wednesday following a meeting with Democratic leaders that failed to bridge the many gaps between their positions on a budget resolution.

The U.S. has endured 20 such closures over the past 40 years, with the average shutdown lasting around eight days and typically having a minimal impact on either markets or the broader economy.

This year’s vintage will be different, however, as it will include a delay in the release of some key labor market data, as well as the risk of deeper government job losses, both of which are foremost in the minds of investors heading into next month’s Federal Reserve policy meeting.

Jack Janasiewicz, lead portfolio strategist and portfolio manager at Natixis Investment Managers, said these two conditions “present the biggest challenges to investors and sentiment, likely in the form of increased uncertainty and heightened volatility” over the near term.

That could be just enough for investors to start paring back some of the market’s recent gains, which have included the best performance in September for the S&P 500 since 2013 and an advance this year of around 17% for the tech-focused Nasdaq Composite .

Gold prices also have rallied hard in advance of the shutdown risk, with bullion reaching a fresh record peak earlier this week to extend its 2025 advance to around 48%, the best annual gain since 1979.

“While a potential government shutdown may be impacting price action across markets, there is building evidence that the rally in stocks could be due for a breather,” said Adam Turnquist, chief technical strategist at LPL Financial.

Turquist noted that the S&P 500 is now trading at an 11% premium to its 200-day moving average, a key performance benchmark. That isn’t only the highest level in nearly a year but also underscores the market’s concern over elevated stock valuations.

That could signal a different market reaction to the shutdown that began in December 2018, the longest in U.S. history, which saw the S&P 500 rally more than 10% over the 35-day period.

But, as Siebert Financial’s Mark Malek noted, “stocks had been trounced just prior, caused mostly by Fed tightening” that was ultimately reversed by the central bank’s “pivot” toward policy easing.

“Now we are trading at all-time highs, and the Fed doesn’t seem to be predisposed to any concessions,” Malek added.

That said, most analysts remain bullish on the market’s end-of-year prospects even if stocks were to give back some of their extraordinary gains from the spring and summer months.

The Fed is expected to continue lowering interest rates, S&P 500 earnings are forecast to grow by more than 10% this year and 13% in 2026, and artificial-intelligence investments are set to yield both monetary and productivity gains. Added to that is the fiscal tailwind from the One Big Beautiful Bill Act and a robust domestic economy.

LPL’s Turnquist also noted that October kicks off what is historically the one of the best three-month periods for stock performance.

“Since 1950, the S&P 500 has generated an average gain of 4.2% from October through December, with 80% of periods producing positive results,” he said. “And when results are positive, the average gain increases to 7%, compared to a 6.7% decline when the three-month
window is negative.”

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