Although historically the US stock market usually performs poorly in September, investors expect the stock market to continue to rise in October in the face of the presidential election, Federal Reserve policies, and concerns about economic recession.

The uptrend in the US stock market is expanding, no longer dominated solely by technology giants.

The US stock market suffered a 'Black Monday' in the first week of September, with technology stocks, AI stocks, and chip stocks heavily hit. The S&P 500 index fell more than 4% throughout the week, marking the largest weekly decline in a year and a half. The Nasdaq 100 fell nearly 6% for the worst weekly performance since 2022, and the chip index fell 12% for the worst in four years. Nvidia fell 14% in the week, marking its worst performance in two years.

However, following a series of economic data showing a cooling of US inflation, economic resilience, and optimistic expectations of a soft landing achieved by Fed rate cuts, the three major US indices saw three weeks of gains. September may end on a high note, with the Dow and S&P 500 repeatedly hitting new highs. The S&P 500 is expected to rise by 5.1% in the third quarter, the best performance in the first nine months of a year since 1997, all happening in historically weak September.

It is worth noting that these gains did not rely on tech giants that have historically driven market growth. In fact, the Nasdaq 100 index only rose 1.7%, while the S&P 500 equal weight index rose nearly 9%, indicating that the recent gains were driven by optimistic expectations of Fed rate cuts and a soft landing, based on a broad foundation.

According to Bloomberg compiled data, the performance of the S&P 500 equal weight index in the third quarter is expected to outperform the conventional market cap-weighted index, and the margin of outperformance is the largest since the last three months of 2022. This indicates that not only large companies but also many mid-sized companies are driving the market higher, showing a broader growth trend in the market.

Note that the S&P 500 equal weight index includes all companies in the S&P 500 index, but each company has the same weight in the index, regardless of the company's market cap size. This is different from the conventional market cap-weighted version of the S&P 500 index, where larger market cap companies have a greater impact on the index.

Additionally, this rebound did not receive much support from Nvidia, which is a representative of the artificial intelligence boom and has been driving the bull market in the stock market for nearly two years, but stalled this summer.

Some investors are full of confidence, betting that US stocks will continue to rise.

Investors remain optimistic about the upward trend of the stock market continuing through October and the end of the year. Mary Ann Bartels, Chief Investment Strategist at Sanctuary Wealth, expects the S&P 500 index to reach 6000 by the end of 2024, about 4.6% higher than the closing price last Friday. She believes that although the chip stocks' rally has paused, large-cap tech and chip stocks will lead the market higher in the fourth quarter.

Her view is supported by hedge fund trading data. According to Goldman Sachs' main brokerage business report, the volume of trades betting on the rise of information technology stocks is nearly three times that of betting on declines.

Options market positions show a similar optimistic sentiment. The five-day moving average ratio of put options to call options in the stock market is close to 0.51, the lowest level since July 2023, indicating that market participants' bearish sentiment towards the future stock market is weakening.

Economic recession risks remain unresolved and caution is still needed.

Despite the optimistic market sentiment, there are still some risks. For example, the Federal Reserve is trying to achieve an economic soft landing after rapid inflation and aggressive rate hikes, but these efforts are rarely successful. In addition, data from the New York Fed shows that the possibility of an economic recession in the next 12 months remains high.

Bartels pointed out, "Friday's employment report is crucial as it will provide us with more clues about the economy and how much the Fed will cut rates at the next meeting."

However, the market generally expects economic growth to remain stable. The GDPNow model of the Atlanta Fed predicts that the annual growth rate of the real Gross Domestic Product (GDP) in the third quarter will increase from 3% in the second quarter to 3.1%.

Furthermore, considering the S&P 500 index is currently at historical highs and lacking strong catalysts such as key economic data or earnings releases, short-term options in the coming weeks seem to be overpriced.

In the next six weeks, investors will need to deal with two key employment reports, earnings reports of major U.S. companies in October, the U.S. presidential election on November 5th, and the next interest rate decision by the Federal Reserve on November 7th.

Traders have differing views on the magnitude of the next rate cut, with the probability of a 50 basis point cut increasing in the swap market. Whichever approach is taken, there is a certain level of risk.

Chief Investment Officer Tony Roth of Wilmington Trust stated: 'If the Fed continues to cut rates at a pace of 25 basis points each time, considering the current economic trend, we believe this may increase the risk of an economic recession next year. Nevertheless, I still predict the S&P 500 index to reach 6,000 points by the year-end. As expectations for an economic soft landing strengthen in the market, the stock market seems to have no choice but to continue to rise.'

Analysts remain bullish on semiconductor stocks.

Despite some short-term market uncertainties, investors maintain an optimistic outlook on the rebound of technology stocks in the long run, expecting this to contribute to the market's upward momentum.

Evercore ISI's Technical Analyst Rich Ross holds a bullish view on semiconductor stocks for the fourth quarter, especially after Micron Technology, the largest U.S. manufacturer of computer memory chips, released an unexpectedly strong sales forecast. He expects the VanEck Semiconductor ETF, including leaders in the chip industry such as Nvidia, Micron, and Broadcom, with a total market value of $253 billion, to rise another 20% by the end of the year after a 45% increase in the first three quarters.

However, Dan Suzuki, Deputy Chief Investment Officer of Richard Bernstein Advisors, stated: "The rebound of technology stocks should drive the market higher, but if this rebound comes at the expense of market breadth, I would not consider it a healthy market signal."

Editor/ping