US Strategy Weekly: September Often Swoons

September has a long history of being a volatile month. Plus, it tends to be the worst performing month of the year with losses averaging nearly 1% in both the Dow Jones Industrial Average and S&P 500 over the last 73 years. And this September could prove extremely challenging since it includes several pivotal events such as the FOMC meeting, a potential government shutdown, and emerging budgetary crises in both the UK and France. See page 3.

The crises in Europe are significant. French Prime Minister Francois Bayrou – the third prime minister in 12 months — called for a crucial no-confidence vote for September 8 after protests were announced in response to his proposed budget which included ending two public holidays and other forms of fiscal restraint. As we noted last week, Bayrou has stated that deficits in France are unsustainable. In the UK the country’s deficit was smaller than expected in July; nevertheless, this week the British pound dropped more than a percent against the US dollar and the yield on 30-year government debt — known as gilts — rose to the highest level since 1998. The catalyst for these actions was the failure of the UK government to pass legislation to cut welfare spending coupled with the reversal of a plan to cut winter fuel payments. Both actions translate into more government debt and the currency and debt markets responded accordingly. Keep in mind that the US faces similar problems and President Trump has tried unorthodox methods such as tariffs and the possibility of a sovereign wealth fund as a way to increase US revenue and build US net worth. To date, these attempts have been met with resistance.

Domestically, a federal court ruled that President Trump’s tariffs are illegal, and this simply adds more confusion to the US economic environment. Thus, September begins with a number of domestic and international issues that could upset markets. Therefore, investors should expect volatility in the near term. The good news is that the S&P 500 index is up 9.1% year-to-date and S&P 500 earnings in the first two quarters of the year rose 5% YOY and 12% YOY, respectively. In short, fundamentals are currently supporting equities. As long as earnings continue to grow – and we expect earnings will surprise on the upside in the second half of the year – equities should do well. This is key to our long-term bullish view

Gold has soared more than 34% this year and according to Reuters polls, analysts have raised 2025 price targets from $2,756 an ounce in January, to $3,065 in April, and to $3,220 in July. The financial media, including Reuters, attributed the recent breakout in the gold chart to the expectation of a Fed rate cut this month. However, if this were true, we believe the price of gold would have jumped right after Chairman Powell’s Jackson Hole presentation on August 22, 2025. In our opinion, the timeline for the breakout in gold is a safe haven move that is more closely linked to this week’s selloff in British bonds. And as we noted above, there are serious fiscal problems in France, the UK, and the US and unless serious steps are taken soon debt markets may be forced to be the disciplinarian. Moreover, it is not unusual for the currency and debt markets to force politicians to do the right thing. We hope politicians at home and abroad are paying attention. In our Outlook for 2025 (December 23, 2024) we wrote: “It behooves equity investors to monitor the bond market in 2025, since it is often the precursor to stock market declines.” We continue to believe this is true.

Economic reports continue to support a Fed rate cut in September. The pending home sales index was 71.7 in July, down from 72.0 in June. The National Association of Realtors’ release indicated that pending sales were down in the West, but up in the South. The ongoing weakness in the housing market was also reflected in second quarter GDP data which showed that fixed residential investment increased by a mere 1.3% YOY and represented less than 4% of nominal GDP. Fixed residential investment has averaged 4.6% of GDP over the longer term. A percentage of 4.6% or better has not been seen since the second quarter of 2002. See page 4.

The second estimate for second quarter GDP indicated the economy grew at a 3.3% annualized rate versus the advance estimate of 3.0%. It was favorable to see this positive adjustment to GDP, but most of the increase was due to a sharp decline in imports (which subtract from GDP). The second quarter decline in imports, which followed a first-quarter surge, was a major contributor to GDP in the second quarter growth, adding 5.1% points. Consumer spending, state and local government spending and fixed investment grew modestly. Inventories were a huge drag and federal government spending, and residential investment were drags. See pages 5 and 6.

The GDP price deflator was 2.5% in the second quarter, down from 2.6% in the first quarter. Historically, there has been a strong correlation between this deflator and the 10-year Treasury bond yield, however, this relationship appears to have broken down in recent years. The disparity could be due to the high level of federal debt and the fear that rising supply will drive down prices. The fed funds rate and the PCE deflator also have moved in synch historically, but the disparity here has also grown. High short-term interest rates are a burden to the Treasury when federal debt levels are high, which explains why President Trump would like interest rates to be lower; but ironically, rates are high because debt levels are high. See page 7.

In July, personal income rose 5.0% YOY and real personal consumption expenditures rose 4.7% YOY. The most important statistic in the personal income report is real disposable income, which increased 2.0% YOY. This is below the long-term average growth rate of 2.7% YOY, yet it is up from the 1.7% YOY seen in June. In short, the positive growth in real personal disposable income shows households are seeing real gains in income but the levels are not robust. See page 8.

The ISM manufacturing index edged higher to 48.7 from 48 in July but rests below 50 for a sixth consecutive month. This is a sign of contraction in the manufacturing sector. The details of the report were mixed, with six of the 11 components trending lower. New orders rose 4.3 points to 51.4, but production fell 3.6 to 47.8. Employment was relatively unchanged at a weak 43.8. The ISM nonmanufacturing index will be reported later this week. See page 9.

Earnings estimates inched higher in the last week. The S&P Dow Jones consensus earnings estimate for calendar 2025 was $258.36, up $0.01, this week. The earnings forecast for 2026 was $300.69, up $0.12. The LSEG IBES estimate for 2025 is $267.58, up $0.03, and the 2026 estimate is $303.35, up $0.11. The IBES estimate for 2027 is $343.00, up $0.32. Although estimates have been moving higher throughout the last earnings season they remain below our forecasts of $270 for 2025 and $310.50 for 2026. However, we expect more positive earnings surprises in the quarters ahead and believe our estimates may prove to be too conservative. The technical backdrop of the equity market remains bullish with the new highs averaging well above 100 per day and the NYSE cumulative advance/decline line recording a new high on August 28, 2025 confirming the high in the DJIA on the same day. Nevertheless, our 25-day up/down volume oscillator continues to hover around zero indicating that volume in advancing stocks and declining stocks has been equal over the last 25 trading days. The last confirmation of new highs in this indicator appeared in July when the oscillator remained above 3.0 for more than five consecutive trading days. All in all, this implies the August rally is relatively weak and a pullback may be ahead. We would be a buyer on weakness.

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