Highlights;
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Historical September Slump: September is traditionally the worst month for the U.S. stock market, with the S&P 500 averaging a 4.2% decline over the last five years. This phenomenon is attributed to various factors, including investor psychology, seasonality, and institutional portfolio adjustments.
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High Valuation Concerns: The S&P 500 currently has a high valuation, trading at 22.4 times forward earnings. Its cyclically adjusted price-to-earnings (CAPE) ratio stands at 37.9, exceeding historical levels 95% of the time, indicating the market is more expensive than usual.
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Historical Returns with High CAPE: When the CAPE ratio surpasses 37, the S&P 500 has historically seen declines, with average returns of -3%, -12%, and -14% over the next one, two, and three years, respectively.
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Potential for Change: Despite historical trends, rising profit margins driven by technology and AI could lead to higher future earnings, potentially justifying current valuations and altering the market’s trajectory.
The S&P 500 has a history of underperformance in September, a trend that may be particularly relevant this year given its current high valuation. Despite this, the index saw a 1.9% gain in August, hitting multiple record highs and achieving a 10% year-to-date return, despite challenges from trade tensions and a weakening labor market.
Historically, September has been a challenging month for the S&P 500, with an average decline of 4.2% over the past five years, making it the weakest month for U.S. stocks. This “September Effect” is attributed to various factors, including investor psychology, seasonal spending patterns, and institutional portfolio adjustments at fiscal year-end, which can lead to increased selling activity.
Current valuations are a concern, with the S&P 500 trading at 22.4 times forward earnings, a level that has historically preceded average declines of 6.4% over the next year. The cyclically adjusted price-to-earnings (CAPE) ratio, or Shiller PE ratio, stood at 37.9 in late August, a level exceeded only 5% of the time since 1957. Historically, such high CAPE ratios have been followed by significant declines over the next one, two, and three years.
While rising profit margins, driven by technological advancements, could potentially justify higher valuations, investors are cautioned to remain vigilant. The following table illustrates the historical performance following high CAPE ratios:
| Holding Period | S&P 500 Return When CAPE Ratio Exceeds 37 |
|—————-|—————————————-|
| 1 Year | (3%) |
| 2 Years | (12%) |
| 3 Years | (14%) |
This data underscores the importance of a cautious approach in the current market environment, even as technological innovations may influence future earnings growth.
In conclusion, while the S&P 500 has shown resilience, the confluence of historical September weakness and elevated valuations signals a need for investor caution.
Source: https://www.fool.com/investing/2025/09/01/stock-market-record-high-sp-500-will-do-this-next/?source=iedfolrf0000001
