09.09.202508:07 Forex Analysis & Reviews: Market plays catch-up

It is necessary to use what works. The market is convinced that the Fed will cut the federal funds rate. Even a hawkish surprise from US inflation in August will not stop the central bank from easing monetary policy. Combined with strong corporate earnings and investor confidence in consumers, this provides grounds to keep buying the dips in the S&P 500, even in the seasonally weak month of September for the broad stock index.

In fact, the first month of autumn may not be so bad for equities. According to Bloomberg research, since 1971, the S&P 500 has often risen in September if the Fed cut rates outside of a recession. A typical example was September of last year. The US economy was not in a downturn, the central bank lowered borrowing costs by 50 basis points, and the broad stock index jumped 2%. The average gain in such periods was 1.2%, compared to an average September decline of 1% across all recorded history.

S&P 500 performance in September

Goldman Sachs expects a similar 2% rally in the S&P 500 by year-end and a 6% advance by mid-next year, thanks to companies playing catch-up against a backdrop of favorable economic prospects. The bank notes that the median stock is lagging its 52-week high by 11%. There is room to grow, and investors have the opportunity to rebalance portfolios. The market still hopes that Donald Trump's sweeping tax cut law will boost household and corporate purchasing power, lending support to the US economy.

According to Morgan Stanley, the long-term outlook for the S&P 500 remains bullish, with small-cap companies expected to take the lead. At the same time, costs related to tariffs will soon start being passed on to consumers. Meanwhile, the Fed's rate cut may stimulate labor demand, accelerate wage growth, and increase the risk of rising inflation. A stagflationary backdrop is the key trigger for a correction in the broad stock index.

Pressure on US equities could also come from the White House report on the effectiveness of the Bureau of Labor Statistics and the administration's intention to produce a similar report on the Fed. Both documents could become Donald Trump's weapons, giving the president grounds to dismiss FOMC officials.

Erosion of confidence in the Fed amid statistical manipulation would be a strong argument for higher volatility and rising bond yields. These factors could weigh on US equities.

Technically, on the daily chart of the S&P 500, an inside bar has formed. This creates an opportunity to set pending buy orders at 6,512 and sell orders at 6,480. A rebound from fair value at 6,455 would provide grounds for a reversal.