Wall Street capped off one of its most volatile trading months of the year after the S&P 500 (SPX) experienced its worst day in August since 2022, but things could get more complicated.

The index recovered all its losses in just three weeks and is once again approaching its all-time high. In July, the S&P 500 broke through 5,660 points and is now just one step away from this milestone. But next month will be more challenging for U.S. stocks.

Stephen Suttmeier, technical strategist at Bank of America Securities, pointed out that historically, September is usually the weakest month for U.S. stocks, with an average decline of 1.2%. In addition, investors will also face the Federal Reserve's upcoming two-day policy meeting from September 17 to 18. The market generally expects the Fed to cut interest rates, but the question is how much the rate cut will be.

“There’s going to be a lot of negative news in the coming weeks, and now that we’re past earnings season, that news is going to be more focused than ever,” said Jay Woods, chief global strategist at Freedom Capital Markets.

Investors will have to carefully pore over the upcoming economic data ahead of the Fed’s interest rate meeting. This week, the U.S. will release the latest non-farm payrolls data, and next week, inflation data will be released, which may reveal more clues about the Fed’s future actions and largely influence investors’ expectations for the Fed’s interest rate cuts for the rest of the year.

If there are any signs in U.S. labor market or inflation data that investors will have to reassess their expectations for Fed rate cuts for the rest of the year, that could hurt stocks.

Traders expect the federal funds rate to fall by 1 percentage point in 2024, according to the CME Group’s FedWatch tool. Some observers say that expectation is too dovish given some recent data showing continued strength in the U.S. economy.

The Atlanta Fed's GDPNow model expects real GDP to grow 2.5% in the third quarter of 2024, up from 2% on August 26. "I think the expectation that the Fed will cut interest rates by 100 basis points in four months is a bit excessive," said Sam Stovall of CFRA. "The Fed has been saying that we don't want to reignite the flames of inflation, so I think the Fed will cut interest rates in September and then monitor the data to decide the next move."

Stovall added, “If the data continues to be stronger than expected, we would remove the expectation that the Fed could cut interest rates in November, which is an uncertain situation because the Fed remains data dependent.”

This week's August nonfarm payrolls report is expected to be a driver of market moves as disappointingly weak July nonfarm payrolls data sparked concerns about slowing economic growth and led to the sell-off on August 5.

Wall Street is expecting a stronger report this time around. Economists expect the U.S. economy to have added 160,000 jobs in August, up from 114,000 in July, according to FactSet data. The unemployment rate should fall to 4.2% from 4.3%, according to consensus estimates.

FactSet data also showed that the market expects the year-on-year growth rate of the US CPI data in August to fall from 2.9% to 2.6%, and the year-on-year growth rate of the PPI data in the same period to fall from 2.2% to 1.7%.

Some market bulls expect the S&P 500 to still have room to rise this year as long as it can get through the next two months, which include the Federal Reserve meeting and the shock of the November presidential election.

Suttmeier said he is watching key technical levels in the U.S. stock market as the S&P 500 hits a previous high again, and if the index can hold above key support at 5,560, the S&P 500 could rise to 6,000. However, in the short term, many believe that money will continue to flow from technology stocks to this year's market laggards. This was demonstrated last week by Nvidia, whose earnings report received a mediocre response and did not drag down the market as much as investors feared.

Of course, long-term investors may want to continue to hold large-cap tech stocks, which could rebound by the end of the year. Stovall said:

“I still think there’s some upside potential in the market between now and the end of the year, but I think we have to get through this rough patch first.”

Article forwarded from: Jinshi Data