The Federal Reserve increased interest rates on Wednesday for the first time this year, and the S&P 500 closed at around 7,550—still up roughly 10% in 2023, yet about 3% below the all-time high reached in mid-August.
So, as October approaches, investors might feel some fresh anxiety. Still, this is also the time of year that has historically been the strongest for the market.
According to data since 1985, the S&P 500 has gained in 34 out of 41 years from the end of September to the end of December, with an average increase in the fourth quarter of about 4.4%. It’s the best quarter by far.
But should investors be doing something different as they head into October?
The strongest quarter
This trend isn’t particularly new or just a lucky run. If we look back to 1950, the S&P 500 has ended the fourth quarter higher in 61 out of 76 years, which is roughly 80% of the time, averaging a gain of around 4.2%. In contrast, the first and second quarters average only about 2%, and the third quarter is even less than 1%. Interestingly, the typical fourth quarter has often outperformed that average, showing a median gain of close to 6% since 1985, as some poor years skew the overall average down.
The scenario this year doesn’t contradict this trend either. Historically, when the index has started the fourth quarter up by 10% or more, it has ended that quarter higher 26 out of 31 times. Personally, I don’t see historical momentum as a reason to sell.
As of the recent close, 2026 seems set to join those positive instances.
When the quarter misses, it misses big
Since 1985, the S&P 500 has only seen the fourth quarter finish lower seven times. Of those declines, four were minor—single-digit drops that long-term investors hardly notice.
However, the other three declines were significant. The fourth quarter of 1987, which was marred by that October crash, saw the index drop around 23%. The fourth quarter of 2008 coincided with the financial crisis, resulting in a similar 23% drop. And in 2018, the fourth quarter fell around 14%.
What’s interesting about these downturns is they didn’t occur because of seasonal trends. They happened due to significant events—a crash, a credit crisis, or the Fed’s tightening at the end of the year.
For instance, in 1987, the index began the fourth quarter up by more than 30% for the year. Strong momentum didn’t help when things went south.
What should investors change?
The 2018 situation is crucial to remember this year because many factors appear similar. On Wednesday, the Fed raised its benchmark interest rate to a range between 3.75% and 4%, marking its first increase since 2023. The central bank noted that inflation is still a concern and left the door open for another potential hike before the year ends.
The last time the fourth quarter took a downturn was when the Fed was also increasing rates, including a hike in December 2018, which coincided with that quarter’s decline. That period particularly affected tech companies; the Nasdaq Composite fell approximately 17% over those three months.
It’s worth noting, of course, that this decline had multiple causes. Yet, a tightening monetary policy was central to the downturn, which casts a shadow over the upcoming quarter starting October 1. If the Fed indeed raises rates again before the year wraps up, we could see similar pressures this fourth quarter.
Despite this, I wouldn’t rearrange my investments solely because of historical seasonal trends. Such history presents probabilities—about four out of five—rather than guarantees.
After all, the only way to benefit from those 34 winning quarters was by staying invested during that time, and the seven losing quarters were arguably unpredictable in the moment.
Additionally, I wouldn’t make decisions about the market’s valuation based on this pattern. Stocks don’t automatically become cheaper just because a historically strong quarter is about to begin.
The S&P 500 enters this October with a valuation exceeding 25 times earnings, which is significantly above its historical average. If a strong quarter does materialize, it will be starting from a relatively high price point.
So, is the market’s best quarter about to kick off? Probably, if we consider the past 76 years. But, then again, that’s just a guess. For those already invested, I think this record mostly suggests maintaining the current approach. I’d continue holding through whatever the quarter brings, even pricey growth stocks. Timing any new purchases with the calendar wouldn’t be a strategy I would recommend.
