September was a very interesting month. As I expected, the S&P 500 defied historical precedence and climbed 1.93%. But what really made September interesting was the fact that both the S&P 500 and Dow breached new all-time highs seemingly every day. Even the first week of October couldn’t spook investors, as the broader indices climbed to new highs again last week. So as earnings season kicks off once again, let’s take a look at what we can expect from the market for the rest of this year…
If you’re a student of the stock market like me, you know the first week of October is historically, for lack of a better word, "scary." Significant market declines have happened during the first trading days of the fourth quarter, including in 1932, 1957 and 1974. Of course, these drops were due to attention-grabbing headlines, like the Watergate Trials and the Soviet Union launching Sputnik.
Despite these instances of historical stock market weakness during the first week of the fourth quarter, however, October is actually the second-strongest month of the year. According to the folks at Bespoke, October is the second-best, November is the third-best and December is the fifth-best months of the year. No wonder the fourth quarter is usually considered the seasonally strong time of year!
Yes, the S&P 500’s earnings are expected to tap the brakes as they report third quarter results this year. In fact, according to FactSet, the S&P 500’s average earnings growth rate for the third quarter has dropped to 4.2%, and sales are only expected to grow 5%. More difficult year-over-year comparisons for major energy companies are one of the primary culprits for the S&P 500’s declining earnings last quarter.
However, the underlying earnings environment still remains solid. According to FactSet again, eight of the S&P 500’s sectors are expected to post earnings growth for the most-recent quarter. Then, as the third-quarter earnings announcement season winds down in mid-November, an early January effect should ensue ahead of the Thanksgiving holiday. Trading volume often increases at this time of year, especially for small- and mid-cap stocks, as pension funding and seasonal buying pressure intensifies. These early January effects usually continue through yearend and then resurface after the New Year.
The bottom line: The stock market should continue to climb higher as the fourth quarter progresses. And, as we’ve discussed before, as any stock market moves higher, it typically becomes more selective and narrow. When this occurs, investors tend to focus on companies with superior fundamentals, companies like the ones on my Emerging Growth Buy List. So, I’m looking for these stocks to continue to "melt up" in the weeks ahead.
But if you aren’t ready to join Emerging Growth right now, please stay tuned into this blog where I’ll continue examining stock market fundamentals and revealing my favorite stocks.