Major research firm unveils stock market forecast for Q4

The stock market has been stuffed with cross-currents following a Four% slide by the S&P 500 index from its July sixteen record peak.

A slowdown for the duration of the economy, specifically job growth, has convinced many experts that the Federal Reserve will initiate cutting interest rates at its Sept. 17-18 meeting. Fed officials have almost said as a full lot.

But how a full lot the economy is weakening is open to query. Nonfarm payrolls grew 142,000 in August, well under the common monthly gain of 202,000 over the prior year. But the extend surpassed the 89,000 gain for July.

Experts are split on whether the Fed will cut interest rates by zero.25 or zero.5 percentage points at its meeting next week. According to CME FedWatch, interest-rate futures point to a seventy one% chance of a quarter-point move and a 29% chance of a 1/2 of-point move.

Just as important is the question of whether a rate reduction is nice or bad for stocks.

If the Fed move is seen as a stimulus for the economy, that needs to be good for stocks. But if a rate cut is seen as a move to right a without warning weakening economy, which may per chance be bad for stocks. That view might be prevalent, especially if the central bank slashes rates by 1/2 of a point.

Corporate earnings and stock valuation trends

Corporate earnings also are a double-edged sword for stocks now. Earnings per share for the S&P 500 surged 11.three% in Q2 from a year earlier, among the crucial best since fourth-quarter 2021, in accordance with FactSet.

Analysts project earnings growth of Four.9% for the 0.33 quarter, which isn’t bad given the strong second quarter. But some experts say the decelerating economy will prevent that strong a showing.

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And in the top many experts say that the market is overvalued. As of Sept. 6 the S&P 500 traded at 20.6 times analysts’ earnings estimates for the next twelve months, in accordance with FactSet. That tops the five-year average of 19.Four and the 10-year average of 18.

Then there’s the September effect on stocks. It’s basically now no longer a happy month for investors. The S&P 500 has lost 1.2% on average in September since 1928, in accordance with Dow Jones Market Data.

That’s the weakest monthly performance on the calendar. The index slid in fifty six% of past Septembers.

Ned Davis Research issues stocks' forecast

But the outlook may change soon, in accordance with Tim Hayes, chief global investment strategist for Ned Davis Research, an esteemed investment research firm.

The market has turned very defensive, as indicated by metrics similar to the market’s risk appetite, he wrote in a commentary.

“ how defensive the market has gotten, it's essential to have the ability to think that either a recession changed into developing or that inflation had returned with a vengeance, sending rates into an upward spiral,” he wrote.

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But that’s now no longer the scenario, Hayes said. “The recession probability remains to be low, inflation is well under keep watch over, and interest rates are trending lower,” he said.

“The earnings outlook remains to be favorable, which wouldn’t be the case if macro conditions were deteriorating.”

So, what accounts for the defensiveness? “It can possibly per chance well be post-summer blues with the advent of September, historically the worst month of the year,” Hayes said.

Stock market rebound may per chance be coming

“If so, and with the macro environment remaining constructive despite the newest jobs data, then the market might be poised to get better once the worsening sentiment has produced excessive pessimism, and September has run its course.”

While September is more often than now no longer a lousy month for stocks, the fourth quarter is among the crucial best three-month period of the year, he said. “Of course, we wouldn’t believe a recovery to be intact without decisive trend and breadth improvement.”

In September, utilities and consumer staples were among the crucial best sectors of the S&P 500 that appreciated.

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Every other market pro waiting for a rebound is Mark Hackett, chief of investment research for Nationwide Mutual Insurance.

“We stay up for continued volatility through November as investors stay up for greater clarity on Fed policy, macroeconomic trends, and, of course, the upcoming election,” he said.

“But it, our outlook for the top of the year remains to be positive. We predict a sturdy fourth quarter, driven by seasonal tailwinds, diminished election uncertainty, and Fed [rate cuts].”

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