Stocks End August on a Down Note. Why Investors Should Prepare for a September Swoon.

Despite a downbeat end to August, all three indexes have rallied between 1.5% and 3% and are near record highs. Above, the New York Stock Exchange. Photo: Michael Nagle/Bloomberg

The stock market ended a sweltering August on a sour note, signaling, perhaps, an early start to a September swoon. Investors should be ready to put cash to work.

The Dow Jones Industrial Average fell about 0.3% this week, dragged lower by a Friday selloff following another report showing persistent inflation pressures. The S&P 500 and Nasdaq Composite were each down 0.1%. Despite the downbeat end to the month, all three indexes have rallied between 1.5% and 3% in August and are near record highs.

Now it’s off to September, historically the worst month for stocks. It’s easy to list the reasons it could live up to its reputation—but investors are counting on the Federal Reserve to save the day with a rate cut when its meeting ends on Sep. 17.

Created with Highcharts 9.0.1Market SnapshotSource: FactSet

Created with Highcharts 9.0.1S&P 500 IndexNASDAQ Composite IndexDow Jones Industrial AverageInvesco S&P 500 Equal Weight ETFAug. 25Aug. 26Aug. 27Aug. 28Aug. 29-1.25-1.00-0.75-0.50-0.2500.250.500.751.001.25%

There is reason for optimism on that front, even if it’s due to economic pessimism. The August jobs report, due out on Friday Sep. 5, is expected to show that only 92,500 jobs were added, up slightly from the disappointing gains of 73,000 in July but still relatively sluggish growth.
The good news, though, is that the slowdown doesn’t seem sharp enough to set off alarm bells, even if it sends an all-clear signal on rate cuts.

But there are other worries still percolating. Producer and consumer inflation data are due on Sept. 10 and 11, respectively. Investors are still wary about the potential for tariffs to hurt consumer spending and corporate profits. Even rate cuts aren’t a given, says Cayla Seder, multi-asset macro strategist with State Street Global Markets: “[One of the biggest risks is] the excitement about the future of rate cuts.” She thinks the Fed will remain data dependent, which could mean that more rate cuts later this year are not guaranteed.

Despite her worries, Seder believes any concerns about the Fed and rates will be offset by expectations for higher earnings growth thanks to the recently signed stimulus bill in Washington, which should lead to 11% earnings growth in 2025, followed by 13% growth in 2026, according to Wall Street analysts. “We see more upside for equities,” she says. “The new tailwind is the One Big Beautiful Bill, which provides incentives for all companies, but especially tech.”

Don Townswick, director of equity strategies at Conning, however, is looking for opportunities beyond the Magnificent Seven. It’s a valuation issue. While the S&P 500 trades for 22.5 times 12-month forward earnings, and the Roundhill Magnificent Seven exchange-traded fund fetches 29.2 times, the Invesco S&P 500 Equal Weight ETF trades for just 17.2 times. “The rest of the market is reasonably valued when you factor in expectations of rate cuts and positive earnings,” Townswick said, adding that guidance for the rest of the year from many companies is “nothing short of spectacular.”

So if there is a September slump for stocks, it would be a good time to go bargain hunting, just as it was after the post-Liberation Day pullback in April. “September has often been the worst month for the market. But if we see a correction, that’s more of a buying opportunity,” says Crit Thomas, global market strategist with Touchstone Investments.

Add that up and it looks like investors don’t need to be too spooked by September after all.

Write to Paul R. La Monica at paul.lamonica@barrons.com