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As we noted last week, seasonal patterns going back to 1950 show that September is the weakest month of the year in terms of stock market performance. September can be particularly weak during midterm election years. But this year the equity market also faces growing tensions in the Middle East since the conflict appears to be expanding after Iran-backed Houthis attacked four Saudi Arabian cities, disrupting energy facilities and wounding 73 civilians. This drove oil prices even higher. The continuous WTI intermediate crude oil future contract advanced another 1.7% to close at $93.03 on September 8, 2026 which is up from a recent closing low of $68.55 on July 6, 2026. Rising oil prices pushed the 10-year Treasury bond yield to 4.8%, as it inches toward the important psychological 5% level.
Carry Trade Jitters
And Iran was not the only development of the week. The Japanese yen surged from 160.17 yen per dollar to 153.73 recently, in anticipation of an interest rate hike by the Bank of Japan (BOJ) next week. However, the move in the yen is threatening an unwinding of the popular carry trade. The carry trade involves borrowing yen at low cost to invest in other currencies and assets offering higher returns. This trade is profitable in calm markets but is dangerous if the yen is volatile. According to a Jefferies analysis of BIS data, cross-border yen borrowing – a proxy for the carry trade – rose to a record $2.35 trillion as of March. This represents the largest carry trade build-up in three decades!
An unwinding of the carry trade could send tremors across global markets. The last disorderly unwinding of the carry trade occurred in August 2024 when a 25-basis-point rate hike by the BOJ sent the yen higher and the Nikkei 225 fell 12.4% in a single day, its worst one-day drop since 1987. In short, there are many things that could make equity markets nervous and unpredictable this September.
September Fed Meeting
Closer to home, the Federal Reserve will also meet on September 15-16 and the CME’s FedWatch shows a 40.6% probability of no change in the fed funds rate and a 59.4% probability of a 25-basis-point increase. This week’s releases of the PPI (Thursday) and CPI (Friday) could prove pivotal in terms of the outcome of next week’s FOMC decision.
We do not expect the Fed to raise rates in September, but the arguments in favor of an increase are rising. Another one of these arguments is the resiliency in the jobs market.
Employment
The BLS employment report for August showed payrolls increased by 162,000 in the month, but more importantly, revisions reversed July’s loss of 23,000 jobs to a gain of 21,000 jobs, and June was revised from 20,000 new jobs to a gain of 31,000 new jobs. In sum, the August payroll report reflected an overall gain of 194,000 new jobs. Three quarters of the August gains were concentrated in leisure/hospitality, government, and healthcare. There were job losses in the information and financial sectors. Retail trade gains were miniscule.
Our favorite economic indicator is the year-over-year growth in total jobs, and this grew a mere 0.38% YOY in the establishment survey and fell 0.38% YOY in the household survey. Both surveys are well below the average gain of 1.5%-1.7% YOY.
The household survey is broader since it includes workers who may not receive a W-2, may be self-employed, a home worker, or an undocumented worker. The household survey is also impacted by the annual US Census population adjustment, which can result in a significant jump or decline in the numbers each January. These adjustments in 2024 and 2025 were unusually large, making the household survey less useful in the last two years, in our view. Still, the negative job growth seen in 2024 and 2026 in the household survey is worrisome since negative growth typically indicates a recession. It is possible that the current administration’s policy of deporting illegals is, at least in part, responsible for the negative growth in jobs in the household survey, and therefore it is a temporary disruption. See page 3.
Discouraged workers fell to 41,000 in August, which was the third-lowest level in the last 20 months. This is a sign of a healthy employment market, and it is in line with the unemployment rate, which has been steady at 4.1% for three consecutive months. The biggest improvement in unemployment rates was seen for workers with less than a high school diploma. This seasonally adjusted unemployment rate fell from 5.4% in July to 4.7% in August. (On an unadjusted basis this unemployment rate fell from 5.1% to 4.1%.) The unemployment rate for workers with a bachelor’s degree or higher was low and unchanged at 2.7%. See page 4.
Technicals are Weakening
Along with the negative seasonality for September, we see some near-term weakening in the technical condition of the equity market. Our 25-day up/down volume oscillator is at 0.15, up slightly from last week but still in the neutral range. Neutral readings in this oscillator while the indices are recording or near all-time highs reveal significant selling into strength. See page 7.
The 10-day average of daily new highs was 168 this week and new lows were 184. This combination of daily new highs above 100 and new lows above 100 shifted this indicator from positive to neutral in mid-May. But this week’s average daily new lows outnumber new highs and tilts the indicator slightly negative. The NYSE cumulative advance/decline line made a new high on August 14, 2026, which is bullish, and in line with the new highs recorded by the DJIA, S&P 500, and Russell 2000 at that time. But both the advance/decline line and the indices have moved sideways in the last three and a half weeks. See page 8. The last significant correction in the S&P 500 was in 2025 between February 19, 2025 (SPX 6,144.15) and April 8, 2025 (SPX 4,982.77), when the index fell 18.9% in response to President Trump’s Liberation Day tariff announcement. The market is overdue for a 10% correction.
Earnings On the other hand, the earnings outlook remains strong. This week the LSEG IBES consensus earnings estimate for 2026 increased $1.23 to $363.49, the 2027 forecast rose $6.30 to $418.76, and the 2028 forecast increased $12.00 to $482.76. The S&P Global consensus earnings estimate rose $0.37 for 2026 to $360.22 and increased $1.13 to $416.05 for 2027. The market is now trading at 21.2 times the IBES 2026 estimate and 18.4 times the 2027 estimate. See pages 5 and 12. Including 2026 S&P Global estimates, the 12-month forward PE multiple is 17.7 times and below its long-term average of 17.9 times! When this PE is added to inflation of 3.4%, it comes to 21.1, which places it within the normal range of 15.0 to 24.4 in terms of long-term valuation metrics. In sum, September and October may be volatile months, but we expect this could create a good long-term buying opportunity.
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
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