Wall Street’s Latest Rally in Question

In the upcoming weeks, we’ll get a clearer picture on Wall Street about whether this recent stock market rally has staying power or if it’s set to falter.

The forthcoming Jobs Report, key inflation figures, and Federal Reserve interest rate decisions will influence the next 14 trading sessions, shaping investor sentiment as they return from summer breaks. The market seems to be at a key juncture, particularly with the S&P 500 Index posting its smallest monthly gain since March, and it might be headed for a challenging month ahead.

Meanwhile, market volatility has subsided, evidenced by the CBOE’s Volatility Index (VIX), which only exceeded the Key 20 level once since late June. The S&P 500 has notably avoided 2% drops for 91 sessions, marking the longest period since July 2024. It achieved an all-time high of 6,501.58 on August 28, reflecting a 30% increase since April 8, and an annual rise of 9.8%.

Thomas Lee, Head of Research at FundStrat Global Advisors, commented, “There’s been considerable effort behind this research. The Fed seems to be pulled back into a somewhat absurd cutting cycle after a long pause, complicating positioning for traders.” He noted that the historically bullish perspective has led to predictions of a 5% to 10% dip in the S&P 500 this fall before a projected rebound towards 6,800 to 7,000 by year’s end.

A Strange Calm

Lee’s skepticism is echoed by some of Wall Street’s most optimistic voices, who worry that the current calm may signal trouble ahead amid a seasonal downturn. Data from Bloomberg indicates that the S&P 500 has typically experienced an average loss of 0.7% in September over the last three decades, declining in four of the past five Septembers.

Key market catalysts are just around the corner, starting with monthly employment reports hitting the spotlight on Fridays. Earlier in August, the Bureau of Labor Statistics reported a surge of nearly 260,000 non-farm payroll additions for May and June. Former President Donald Trump criticized the head of the agency, accusing her of manipulating data for political motives.

The BLS will also reveal revisions to its current employment statistical facilities survey on September 9, which could shift expectations for job growth.

Then, on September 11, inflation data will be released, with the Consumer Price Index report following on September 17. Investors are hoping for guidance on interest rate paths from Powell, with the swap market pricing in about a 90% chance of a Fed rate cut during this meeting.

A few days thereafter, “Triple Witching” will occur, likely inflating market volatility as a large number of stock-bound options expire.

This creates a considerable amount of uncertainty. Yet, it’s curious to observe that traders seem strangely unconcerned about these pivotal data points and decisions. Hedge funds and significant speculators maintain positions at levels not seen in three years, with Jobs Day revealing a positive volatility reading of just 85 basis points that implies the market is easing its risk stance, according to Stuart Kaiser from Citigroup’s U.S. equity trading strategy.

Risk of Turbulence

However, this calmness and extreme positioning historically precede a spike in volatility. This was evident in February when the S&P 500 peaked amid worries about the Trump administration’s tariff strategies. Traders had also shorted the VIX at significant levels in July 2024. Following that, trade fell sharply in August, leading to a wave of position covering.

The VIX nudged up towards 16 on Friday after dipping to its lowest levels since 2025, but it remains about 19% under the annual average.

There is, of course, a fundamental reason behind the S&P 500’s current standing. The economy appears to be holding strong despite Trump tariffs, with solid profit growth among U.S. companies, leading to a bullish sentiment among investors—one that’s the most optimistic about U.S. stocks since the peak in February, with cash levels reduced to 3.9%, according to a recent Global Fund Manager survey from Bank of America.

Yet, there’s a cyclical dilemma. As the S&P 500 ascends, worries about overvaluation grow. The index is currently trading at an average revenue forecast of 22 times analysts’ estimates over the following year. Historical patterns show that such high valuations have only been seen during bubbles, like the tech boom or the pandemic spike in 2020.

Tatyana Bunich, president and founder of Financial 1 Tax, remarked, “We are keen on big tech stocks, but they’re priced so high at the moment. We’re holding back, waiting for a more favorable pullback before increasing our positions.”

Ed Yardeni, a notable bull from Yardeni Research, voiced skepticism about the likelihood of an imminent Fed rate cut, given the persistent threat of inflation.

Yardeni expressed, “We really hope this stock rally slows down soon. The market seems to be pricing in a lot of optimistic news, meaning a strong CPI reading or robust employment figures could quickly shift trader sentiment, leading to potential short selling.”