Wall Street entered September with the S&P 500 hovering just 2.5% below its record high, even as a mix of risk signals, including Fed rate hike risks, has emerged. Analysts caution that investors should remain alert, although the historical seasonal weakness associated with September may not be as clear-cut as often portrayed.
Note that Wall Street delivered an upbeat August. The S&P 500 advanced more than 2.5% in August, while the Nasdaq gained more than 3%. The Dow climbed about 1.3% for the month.
But September is historically the worst month of the year for U.S. stocks. The S&P 500 has retreated 56% of the time in September, by an average of 1.17%, per Bank of America’s Paul Ciana, who cited data dating back to 1927, as quoted on Bloomberg.
Note that terrifying financial events, such as the start of the Great Depression in 1929 or the fall of Lehman Brothers in 2008, all crept up in the month of September.
However, this September could be different due to a banner second quarter earnings season. Thanks to rising earnings estimate revisions, the market may remain strong even as it enters a seasonally weak period. If there is any volatility, it could make a great buying opportunity as we are setting up to rally into the year-end.
Inside Upbeat Earnings Projections
The overall earnings picture has been positive over the last two years, but it has not been this strong in quite some time. Growth is now gaining momentum across a broader range of companies. The improving earnings trend points to a supportive backdrop for equities.
For 2026 Q3, the expectation is that total S&P 500 earnings will increase +22.6% from the same period last year on +10.9% higher revenues, with 14 of the 16 Zacks sectors expected to enjoy positive earnings growth and five sectors producing double-digit growth. This will be the most broad-based earnings growth in recent times.
With the S&P 500's second-quarter earnings season nearly complete, roughly 86% of companies have surpassed EPS estimates, according to FactSet. That compares with five- and 10-year averages of 78% and 76%, respectively, as quoted on Yahoo Finance.
Fed Rate Hike Probability?
Due to the sticky inflation, the Fed might hike rates in September. Speaking at the Federal Reserve’s annual Jackson Hole symposium in late August, Fed chief Warsh indicated that recent inflation readings have not provided enough evidence of a sustained slowdown in underlying price pressures, as quoted on CNBC.
His comments prompted traders to sharply increase expectations for a September rate hike. Fed funds futures showed a 66.1% probability of a hike, up from 41.4% a week ago (at the time of writing), according to CME Group’s FedWatch tool.
But then, consumer sentiment fell sharply in August, highlighting persistent economic concerns. J.P. Morgan now expects the Fed to deliver a quarter-point rate hike in December, as quoted on Reuters. Although inflation had been rising on higher fuel, food and AI spending, Fed Chair Warsh did not endorse a rate hike as the necessary response right now.
NVIDIA & Salesforce Earnings Raise the Bar on AI Growth
NVIDIA NVDA delivered upbeat results and projected about 70% revenue growth in fiscal 2028, well above Wall Street’s 43% forecast. Meanwhile, Salesforce CRM surprised skeptics with its AI strength after launching Claudeforce with Anthropic. Claudeforce connects Claude directly to Salesforce's CRM, Slack, and Agentforce.
Salesforce also delivered a beat-and-raise quarter, sending shares up nearly 23% Thursday—their best day since 2020 and second-biggest gain since its 2004 IPO, per CNBC.
All this makes it more important to identify exchange-traded funds (ETFs) that have the power to move ahead this September (read: Best-Performing Leveraged ETFs of August).
ETFs in Focus for September
First Trust Dow Jones Internet Index Fund FDN – Zacks Rank #2 (Buy)
As mentioned above, the AI strength is in fine fettle. Excluding Alphabet (GOOGL), Micron (MU), and NVIDIA, Q3 earnings for the rest of the Tech sector would be +18.9% (vs. +39.3% otherwise). This makes it important to bet on this ETF. Moreover, long-term U.S. treasury bond yields are at check, which the tech sector is dependent on. As a result, any rise in long-term rates should not pose a threat to the tech sector.
First Trust NASDAQ Cybersecurity ETF CIBR
The shift toward cloud computing has led to high demand for advanced cybersecurity. Heightened geopolitical tensions also led organizations to adopt more cybersecurity solutions.
Vanguard High Dividend Yield Index Fund ETF Shares VYM) – Zacks Rank #2
The underlying FTSE High Dividend Yield Index consists of common stocks of companies that pay dividends that generally are higher than average. The fund charges 4 bps in fees and yields about 2.21% annually.
Dividend investing offers great safety in any kind of economic doldrums. With the U.S.-Iran tensions in place, dividend investing should not be ignored (read: Are Inflation Fears Back? ETFs May Help Protect Your Portfolio).
State Street Consumer Discretionary Select Sector SPDR ETF XLY – Zacks Rank #3 (Hold)
The fund provides exposure to retailers that can benefit from resilient spending among financially stronger consumers. With the U.S. economic recovery being K-shaped, ETFs focused on higher-end retailers should gain. Amazon takes the top spot in the fund, with about 25% exposure.
A still-contained inflation level, a moderate labor market and last-minute back-to-school/college shopping should give the space a boost. The fund charges 8 bps in fees.
Simplify Interest Rate Hedge ETF PFIX
The fund seeks to hedge interest rate movements arising from rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for income.
If labor market data come in stronger, Middle East tensions escalate, oil prices continue to rally, the Fed may be forced to act hawkish. In sch a scenario, PFIX, which charges 50 bps in fees and yields 7.37% annually, should outperform.
Invesco DB Agriculture ETF DBA
The agricultural sector is in good shape, due to the supply crunch stemming from the inclement weather and the geopolitical tension. With the drivers behind the soft commodities rally still in place, we expect DBA to stay steady in September (read: Agricultural ETFs Top S&P 500 Two Months in a Row: Here's Why).
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This article originally published on Zacks Investment Research (zacks.com).
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