September Skies
Funny how that memory
Never dies
And when that first leaf falls
Days turn cold, nights grow long
Like an old Sinatra song…

For me, the day after Labor Day is a melancholy time that always brings to mind those lyrics from a Brian Setzer tune. But as days turn cold and nights grow long, investors have nothing to feel sad about.

Although the stock market started September with a stumble, the rally finished the month of August on solid footing.

The S&P 500 closed out its fourth straight winning month last Friday, ending August with a 2.3% gain for the month.

After a steep correction of nearly 10% in early August, stocks rebounded strongly, driven by a resilient economy, accelerating earnings growth, and the Federal Reserve’s expressed readiness to ease monetary policy.

Year to date, the S&P 500 is up by about 16% (as of market close September 3). The S&P 500 and other major indices, including the Dow Jones Industrial Average and NASDAQ, hover at record highs.

That said, the first trading day of September saw equities finish in the red. On Tuesday, the main U.S. stock market indices closed sharply lower as follows:

• DJIA: -1.51%
• S&P 500: -2.12%
• NASDAQ: -3.26%
• Russell 2000: -3.09%

Crude oil prices continued their slide, as fears flared anew that slowing economic growth would cause energy demand destruction.

Wall Street is worried about the economy…again. The latest Institute for Supply Management (ISM) survey, released Tuesday, showed 47.2% of purchasing managers reported growth in August, a slight uptick from July’s 46.8%, but still below the 47.9% analysts had expected.

It’s likely that Tuesday’s slump is ephemeral and an overreaction to the day’s gloomy economic data. Other indicators, such as strong gross domestic product (GDP) growth and waning inflation, remain quite favorable.

Eyes on the long term…

With inflation nearing target levels, the long-term focus is shifting towards growth for both investors and the Federal Reserve. Despite the Fed’s history of policy missteps, it appears set to embark on a multi-year cycle of rate cuts while economic growth holds firm. Wall Street starts September with the conviction that a rate cut is a done deal.

However, high expectations have created a hurdle for technology giants, which lost their leadership role last month. Meanwhile, broadening earnings growth is supporting the comeback of underperforming stocks, as recent market volatility has played to their advantage.

Historically, the period leading up to November’s election day is challenging for the stock market. As volatility intensifies, you should capitalize on it. Generally, the start of a rate-cutting cycle benefits stocks, provided the economy isn’t in recession…and a recession is not in the cards.

The resilience of the AI boom…

Tech stocks are facing headwinds as tougher year-over-year comparisons and high valuations take their toll on a few pricey mega-caps, e.g. chipmaker Nvidia (NSDQ: NVDA).

On Tuesday, tech stocks took it on the chin, especially NVDA, as evidenced by the NASDAQ’s steep drop. NVDA fell 9.53%.

However, this bearish market action is likely only a temporary blip.

Despite the recent emergence of caution about artificial intelligence (AI), the fundamental outlook for AI remains strong. Major tech firms and cloud service providers continue to invest heavily in AI, driven by robust demand.

The pay off from these investments remains to be seen, but for now, the perceived risk of missing out on AI-driven innovation outweighs the cost of these investments. The following chart tells the story:

Source: Markets and Markets

Meanwhile, broadening earnings growth is aiding the recovery of lagging stocks. Unlike the first half of the year, a wider array of sectors and stocks are now contributing to the market’s rally, underscoring the gradual shift in leadership that I anticipated.

Although the S&P 500 hasn’t yet surpassed its early August highs, the equal-weighted index has reached new peaks, showing that recent market volatility has benefitted the “average” stock. Supporting this theme of broadening, S&P 500 earnings growth, excluding the top-performing tech giants, was positive for the first time in five quarters, according to FactSet.

Nine out of eleven sectors reported positive earnings growth, with financials, health care, utilities, and tech showing the most significant surprises. I expect that these improving earnings trends beyond the mega-cap tech stocks will lead to more balanced gains in the final months of the year.

Corporate earnings are showing strength. With nearly all S&P 500 companies having reported second-quarter results, the earnings season is effectively over. An impressive 80% of companies have beaten analyst forecasts by an average of 5.2%, with overall earnings for the index rising by 11.4%, marking a noticeable acceleration from the first quarter.

Earnings projections for full-year 2024 and 2025 still suggest growth rates exceeding 10% annually. This robust outlook for corporate profits provides continued support for the ongoing bull market, even as investor sentiment fluctuates in the run-up to the presidential election.

The green rush…

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Jim is the chief investment strategist of our flagship publication, Personal Finance. He tells me that this particular company is the biggest win-win opportunity he’s ever seen in the marijuana market.

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John Persinos is the editorial director of Investing Daily.

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