Summary
Valuation Concerns Moderate The U.S. Federal Reserve met expectations when it cut the fed funds rate by 25 basis points at its mid-September meeting. The Fed hinted at two additional rate cuts by year-end, while simultaneously calling the September cut a ‘risk management’ action. Economic data is scarce as September winds down, and the earnings calendar is light. In the absence of any clear drivers, the U.S. stock market keeps grinding out new highs. Earnings performance year to date has been good, and earnings expectations are moderately positive. Those factors have kept valuations from soaring to excessive levels. Stocks are not cheap, but do not appear overvalued. Barring a market collapse in the final trading days of the month, the S&P 500 is preparing to exit September up in double-digit percentages through the first nine months of the year. That usually portends a stronger-than-normal final quarter and full-year capital appreciation that is far above average. September Shakes its Bad Reputation September has earned a bad stock-market reputation. Over the 1980-2024 period, the S&P 500 has averaged a decline of 1.01%. That is by far the worst performance for any month of the year. The other two weak months are at least fractionally positive, with average gains of 0.03% for August and 0.32% for June. September is also the only month in which the S&P 500 has been down more often than it has been up, with only a 49% ‘win’ rate; most months have been positive at a mid-60% rate since 1980. September has had some winners, including mid-single-digit gains in 1995-1998 and 9% in 2010. But it has also featured some real collapses, including declines of 11% in 2002, 14% in 2008, and 9% as recently as 2022. This year, September is belying its bad reputation. As of the close on 9/19/25, the S&P 500 was up 3.2% for the month to date. The market is digesting the administration’s latest policy announcement related to the proposed $100,000 fee for H-1B visa applications. Yet the share prices of many companies perceived as most exposed to this policy are continuing higher. Many of the most impacted companies are part of the AI trade and are far out in front of the broad market for the year to date. Third-Quarter Update September is wrapping up a quarter in which the market rotated back to leadership from growth sectors. For 3Q25 to date as of 9/19/25, the best sector has been Information Technology, up 12.1%. Consumer Discretionary has bounced back by 11% for the quarter to date, while Communication Services is up 10%. Every sector but one (Consumer Staples) is positive in 3Q25. However, only the three growth-sector leaders are doing better than the S&P 500, which is up 7.4% for the third quarter. Sectors lagging the broad market but outperforming peers include Materials, up 6.5% for the quarter, and Financial, up 5.1%. They are trailed by (in descending order) Energy, Utilities, Healthcare, Industrial, and Real Estate. On a granular basis, the AI trade continues to drive overall stock-market returns. According to Argus technical strategist Mark Arbeter, CMT, nine stocks — the Mag 7 plus Taiwan Semiconductor and Broadcom — have market caps of over $1 trillion. Eight of the nine (TSM is foreign-domiciled) make up 35% of S&P 500 market capitalization. The 13% gain in the index for the year to date is somewhat misleading or at least imbalanced, as the Mag 7 stocks are up about 40% whereas the equal-weighted S&P 500 is up about 6%. While measures of stock performance are immediately available, two key indicators of the quarter — calendar earnings and GDP — will not begin to become available until late in October. According to the Atlanta Fed’s GDPNow forecast, gross domestic product is on path to increase at a 3.3% annual rate in the third quarter of 2025. Argus’ Director of Economic Research is Chris Graja, CFA, and he is looking for growth in the 2% range for the quarter, which is close to the Bloomberg consensus. The third quarter is regarded as providing the first ‘clean’ measure of GDP growth in 2025, given that quarters one and two were distorted by inventory accumulation and other pre-positioning ahead of the implementation of tariffs. Given that overall tariffs are not fully settled, however, we may not get a ‘fully clean’ read on GDP for any quarter in 2025. A few weeks before the money-center banks kick off the 3Q25 earning season, the various EPS estimate-compiling companies (Bloomberg, FactSet, and Refinitiv) are generally looking for annual EPS growth in mid- to high-single-digit percentages. That is better than expectations heading into the 2Q25 EPS season, when the outlook was for low- to mid-single-digit growth. Still, EPS compilations based on consensus routinely underestimate EPS growth by several percentage points, given consensus reliance on conservative (if not downright misleading) company guidance. Argus is modeling high-single-digit to low-double-digit EPS growth for 3Q25 earnings, which would be in line with 10% average EPS growth for the past six quarters. Conclusion As of market close on September 19, 2025, the Nasdaq Composite was up 17.2%, the S&P 500 was up 13.3%, and the Dow Jones Industrial Average was up 8.9%. Within the S&P 500, three sectors are doing better than the market overall. Two are the traditional growth leaders: Communication Services is up 23.3% and Information Technology is up 21.8% as of 9/19/25. Consumer Discretionary, however, is in the middle of the pack, given weak net performance across the first