Why investors shouldn’t worry about weak stocks in September

The reasons for investors not to fear September or record highs have been laid out by a City bank after Wall Street markets started the month in downbeat fashion.

Over the past decade, September has been the worst-performing month for the S&P 500 index as declines in six of the years have resulted in an average return of minus 2%.

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However, UBS Global Wealth Management points out that September weakness has been followed by average returns in October and November of 1.2% and 4% respectively.

The S&P 500 index topped 6,500 for the first time at the end of August, but UBS said stock market history shows this is also no reason for concern.

Since 1960, the leading US benchmark has generated 12% returns in the year following an all-time high and about 38% over the following three years.

In its base case, the bank expects the S&P 500 to reach 6,800 by the end of next June.

Despite potential volatility and short-term pullbacks, it believes investors who are under-allocated to equities should consider phasing in and using dips to add equity exposure.

Alongside artificial intelligence (AI), power and resources, the bank favours US technology, healthcare, utilities and financials.

While the S&P 500’s forward price/earnings (PE) ratio, at around 22 times, is at the upper end of historical ranges this is supported by robust earnings growth.

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Including this year, start of the year PE valuations have only been above 21 times on five occasions since 1950.

Stocks performed well in 1999 and 2021 owing to strong earnings growth and a supportive Federal Reserve. In contrast, they struggled in 2000 and 2022 as earnings momentum stagnated and the Federal Reserve raised interest rates to slow down the economy.

UBS said: “In our view, the macro backdrop this year remains supportive. The Fed is on the cusp of cutting interest rates and earnings momentum has been solid.”

The bank notes that 81% of companies reported second-quarter results ahead of estimates, while current quarter guidance was also positive.

This underpins UBS’s forecast of S&P 500 earnings per share growth of 8% to $270 (£201) in 2025, followed by a rise of 7.5% to $290 in 2026.

Long-term AI trends also remain intact after most big tech companies beat sales and earnings estimates in their results. The bank recently raised its global AI capital expenditure forecasts for this year and next to $375 billion and $500 billion respectively.

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While some price pressures persist, especially in services, cooling energy prices and steady goods inflation has helped to contain broader price pressures.

Jobs market data point to softer demand, prompting a more dovish tone from Federal Reserve officials in recent weeks. The bank expects the Fed to cut rates by 100 basis points over the next four meetings and believes this will be supportive of equities.

UBS’s Global Wealth Management team said that periods in which the Fed cuts rates while the economy is still growing have historically been associated with positive equity market returns.

They added: “High valuations are not a clear signal for next 12-month returns.

“Instead, focus on the Fed and earnings, which are usually more important. Valuations can appear elevated for extended periods. Ultimately, a negative catalyst is needed in order to drive a material de-rating, which we don’t believe is currently on the horizon.”