The S&P 500 enjoyed a four-month winning streak through August, fueled by a resilient U.S. economy and cooling inflation (Lplfinancialatcypruscu). Consumer spending has held up (July spending rose even as core PCE inflation ticked slightly higher to ~2.9% YoY (Lplfinancialatcypruscu)), and overall price pressures are near the Fed’s 2% target. However, there are signs of slowing momentum. Key data indicate the labor market is gradually loosening – U.S. job openings in July fell by 176,000 to about 7.18 million, undershooting forecasts (≈7.38M) (Reuters). Similarly, unemployment has inched up from its lows, and consumer sentiment softened in late summer. Global conditions add to caution: Europe’s growth remains sluggish and China’s economy is under pressure from a weak property market and sluggish consumer spending (July retail sales grew just 3.7% YoY, the slowest since 2024) (Reuters). In short, the macro backdrop is one of solid but moderating growth – enough to keep businesses profitable, but with increasing headwinds that warrant close attention.
All eyes are on the Fed’s next move. Markets are now overwhelmingly betting the Fed will cut rates at the upcoming September 16–17 meeting. Fed funds futures imply about a 91% probability of a 0.25% rate cut next week (Reuters). This dovish shift comes as inflation has eased and the Fed itself has signaled openness to easing. Notably, Fed officials have turned more accommodative in tone: Governor Christopher Waller, for example, publicly endorsed a September cut to get ahead of a potential downturn as labor market data cools (Reuters). The consensus view among major banks (J.P. Morgan, Morgan Stanley, etc.) is that September will likely mark the start of an easing cycle, with perhaps 3-4 small cuts by early 2026 (Reuters) (Reuters). This anticipated policy pivot has been a tailwind for equities – lower rates improve valuations and support economic activity. However, a risk is that the Fed disappoints these expectations: officials like New York Fed President John Williams have cautioned that any cut is data-dependent on upcoming employment numbers (Reuters). With such strong market pricing for a cut, a hawkish surprise (delay in cutting or a very cautious outlook) on September 17 could jolt both bonds and stocks. For now, though, the Fed path appears to be tilting dovish, which is easing financial conditions at the short end of the curve and generally underpins a positive equity outlook – provided the economy’s weakness remains only moderate.
Robust corporate earnings have been a foundation for the S&P’s recent strength. The second-quarter earnings season (now nearly complete) was considerably better than expected. S&P 500 aggregate EPS growth is coming in around +12% year-over-year (Sterlingfg), more than double the roughly +5% growth forecasted at the quarter’s start. Over 80% of companies beat their profit estimates, and about 50 firms even issued positive forward guidance, both figures above historical averages (Sterlingfg) (Sterlingfg). This upside surprise has led to a notable uptick in analyst revisions – the breadth of upward earnings revisions has improved markedly, countering arguments that stocks are in a “bubble” detached from fundamentals (Sterlingfg). Moreover, earnings results have not been concentrated in just a few names; while megacap tech stars like NVIDIA delivered strong numbers (helping cement the AI-driven optimism), even that stock slipped post-earnings due to a few softer metrics in its report (e.g. weaker China sales) (Sterlingfg). Such reactions show the market is discriminating and not simply rallying on hype – a healthy sign. Overall, corporate America’s performance in Q2 has been solid, with resilient margins and revenue growth demonstrating that the economy’s slowdown hasn’t bitten into profits severely. Looking ahead just a few days, there are few major earnings reports due, so the macro news will dominate. But the strong earnings backdrop provides a cushion – it’s easier for investors to stay bullish on stocks knowing that earnings growth is coming through better than expected. Any change in sentiment would likely require either a sharp deterioration in economic data or guidance, or some external shock, rather than an earnings-related issue, given the recent positive trend on profits.
Investor positioning heading into early September reflects cautious optimism. The summer rally to all-time highs naturally left many portfolios overweight equities, especially in technology and growth names. However, late August saw a healthy rotation: some of the capital that had chased the big tech momentum began moving into other sectors and smaller-cap stocks (Sterlingfg). This rotation means market leadership is broadening beyond the ultra-cap tech darlings – an encouraging development, as a rally supported by many sectors tends to be more durable. Indeed, flows data indicated buyers moving into cyclical sectors and value plays, suggesting a bit of unwinding of the crowded mega-cap trade (Sterlingfg). On the sentiment front, we’ve transitioned from extreme calm to a rise in uncertainty. Wall Street’s “fear gauge” – the VIX volatility index – spiked this week, jumping over 3 points to around 19.3 on Tuesday amid trade and rate fears (Cnbc). Although a VIX in the high-teens is not alarmingly high by historical standards, that surge from previously subdued levels shows that investors have been adding hedges and are bracing for volatility. Surveys of fund managers and retail sentiment in late August pointed to fairly bullish outlooks, which can be a contrarian warning sign. It appears that the pullback to start September injected a dose of fear that may actually prevent complacency. For example, after the S&P 500 fell 0.7% on Tuesday, demand for protective put options rose and defensive assets like gold saw bids, indicating that some players are preparing for choppier waters (Reuters). Yet, signs of froth are limited – we are not seeing the kind of euphoria or leverage that often precedes major tops. If anything, the modest 2-3% dip from the highs and quick stabilization suggest traders are still inclined to “buy the dip,” but with tighter stop-losses. One notable vote of confidence: HSBC strategists just raised their year-end S&P 500 target to 6,500 (slightly above current levels), citing the Fed’s pivot and robust earnings as reasons to remain constructive (Reuters) (Reuters). All in all, positioning is somewhat two-sided – there is ample bullish exposure, but also a growing contingent of investors balancing that with hedges. This mix could either buffer the market (if modest declines attract dip-buyers) or, if a negative shock hits, those hedges could soften the blow. It’s a more cautious stance than earlier in the summer, which is appropriate for the upcoming event risk.
One development that has captured market attention is the shifting term structure of interest rates. After an extended period of yield curve inversion (with short-term rates above long-term rates), late August and early September saw the curve begin to steepen from the long end. In the past week, U.S. Treasury yields at the long end spiked – the 30-year yield briefly touched 5.0% for the first time in over a month (Reuters). This surge was propelled by growing fiscal concerns, notably a court decision that invalidated a wide swath of Trump-era tariffs. The prospect that the government may have to refund billions in tariff revenues – potentially worsening the deficit – triggered a global bond selloff and pushed long-term yields higher (Cnbc). At the same time, expectations of Fed rate cuts have kept short-term yields relatively anchored. The net effect is a partial unwinding of the inversion: the 2-year yield (hovering around the mid-4% range) is now much closer to the 10-year (≈4.3%) (Cnbc), and the spread between 10-year and 30-year yields turned positive as the 30-year jumped. In theory, a less inverted curve could be a positive sign (indicating optimism about future growth or inflation normalizing). However, context matters – here the steepening is driven by term premium and supply fears rather than upbeat growth. Bond investors are essentially demanding higher long-run yields to compensate for inflation uncertainty and the US’s heavy debt issuance schedule. For equities, the term structure shift poses a headwind. Higher long-duration yields directly impact stock valuations, especially for high-growth sectors: a 30-year yield near 5% starts to compete with equity returns and raises the discount rate on future earnings. As one strategist noted, a 5% long bond is “a thorn in the side” of stocks with stretched valuations (Cnbc). We’ve already seen this play out: the jump in yields earlier this week hit tech stocks and other duration-sensitive segments of the market hardest (Apnews). If long-term rates continue to climb, it could impose a valuation ceiling on the S&P 500 in the near term. Conversely, any moderation in yields – perhaps if investors gain confidence that fiscal risks will be managed or if the Fed’s dovish actions pull down rate expectations – would be a relief for stocks. For the coming days, the bond market’s behavior will be critical to watch: an orderly Treasury market would help stocks stabilize, while any disorderly spike in yields (say, 10-year yields galloping well above 4.3%) could quickly send stocks lower again.
September is notorious on Wall Street, and so far it’s living up to that reputation. Historically, this month has been the weakest of the year for equities. Over the past 75 years, the S&P 500’s average September return is about –0.7%, the worst of any month (and it has finished positive only ~44% of the time) (Lplfinancialatcypruscu). More recent history accentuates this cautionary tale: in the last five years, September has averaged a sizable –4.2% drop for the S&P (and about –2% on average over the last 10 years) (Cnbc). Various factors make September a tough month – fund managers often rebalance portfolios or take profits as they return from summer, U.S. Treasury and corporate debt issuance typically jumps after Labor Day (which can siphon liquidity from stocks), and there’s frequently a “void” of positive catalysts until Q3 earnings or holiday season optimism kicks in. Indeed, analysts pointed to seasonal rebalancing and heavier debt issuance as one reason stocks stumbled out of the gate this month (Reuters). This year, after a strong run to record highs by end-August, it’s not surprising to see a early-September pullback; CFRA’s data shows that in years where the S&P notches 20+ new highs through August (as it just did), September has usually seen the market “surrender some recent gains” in the absence of fresh positive news (Cnbc). That said, seasonal tendencies are a background factor, not destiny. Bulls will point out that when the market enters September with strong momentum and a solid technical uptrend (i.e. above the 200-day moving average), the odds of a positive September improve markedly (historically averaging +1.3% in such cases) (Sterlingfg). Additionally, the latter part of the fall can bring recoveries – October is often termed a “bear killer” month, where any September weakness can reverse on year-end positioning or policy changes. For the next 3-day window specifically, the seasonal effect suggests a bias toward caution – there is often a continuation of early-September volatility as funds finalize quarter-end adjustments. Traders shouldn’t be lulled by the quiet summer; September’s choppiest period may be the first two weeks, and 2025 seems to be following that script so far.
Several immediate risks could sway the S&P 500’s trajectory in the coming three sessions. The most prominent is the looming August U.S. employment report (due Friday, Sept 5). This jobs report is critical for both economic momentum and Fed policy. Expectations are for a modest payrolls increase (analysts estimate on the order of ~75,000–80,000 new jobs) and a slight uptick in unemployment to about 4.3% (I3investor). If the data comes in hotter than expected – say well above 100k jobs with unemployment dropping – it could throw cold water on the market’s rate-cut hopes by suggesting the economy isn’t cooling enough (Lplfinancialatcypruscu). Yields would likely jump in response, and stocks could sell off on fears the Fed might delay easing. On the flip side, an unexpectedly weak report (e.g. net job losses or a big jump in joblessness) could spark recession worries, although it would also almost guarantee a Fed cut. In such a scenario, the initial market reaction might be negative (due to growth fears) but could later turn positive on the prospect of faster Fed relief. In short, Friday’s jobs number is a potential inflection point – it will be parsed in the context of, “bad news might be good news” up to a point, but too bad would be bad for everyone.
Another risk factor is the policy and political backdrop. The recent legal developments around tariffs exemplify this: the court ruling striking down most of the previous administration’s tariffs has introduced uncertainty about trade policy and fiscal implications (Cnbc). The idea that tariff revenue might disappear (or even be refunded) has already contributed to a spike in long-term rates and volatility. Moreover, the current administration’s stance – President Trump’s calls for easier Fed policy and his nomination of a political ally (Stephen Miran) to the Fed Board – raises questions about the Fed’s independence (Apnews) (Reuters). Investors generally dislike any hint of political interference in central banking, so this storyline could continue to cause concern, especially if there are heated comments or actions in the run-up to the Fed meeting. We should also keep an eye on fiscal politics: as the U.S. fiscal year-end (Sept 30) approaches, any budgetary standoff or shutdown threat in Washington could become a headline risk that dents market confidence.
Global risks present another wildcard. While the U.S. has been the standout performer, a deeper deterioration abroad could spill over. China’s growth slowdown, for instance, not only hits commodities (pressuring energy and materials stocks) but could also hurt the sales of U.S. firms with big China exposure. Recent data from China has been soft – e.g. industrial output growth cooled to an 8-month low and youth unemployment has surged – and there’s ongoing stress in their property and shadow banking sectors. Europe is facing its own stagnation and inflation dilemmas, and geopolitical tensions (from U.S.-China trade frictions to Middle East issues) always have the potential to flare up without warning. Any such development could quickly shift the risk sentiment, even in the span of a few days.
Finally, market technical factors and positioning dynamics could amplify moves. The S&P 500 is currently just a few percent off its all-time high (~6,500). If bullish news (like a very soft jobs report or clear Fed dovish signals) pushes the index back toward that level, there’s a chance of a upside breakout as FOMO (fear of missing out) kicks in – especially given that many investors have fresh memories of 2023’s rapid rebounds and won’t want to be left behind. Conversely, if the index falls below last week’s lows (around the 6,370–6,400 zone), we could see accelerated selling as trend-following algorithms and systematic funds trim exposure. Volatility is already elevated relative to a month ago, and a shock (good or bad) could drive outsized swings due to thinner post-summer liquidity. It’s also worth noting that September/October has seen some historic market air-pockets (e.g. past portfolio deleveraging events). While nothing currently suggests a calamity, the risks mentioned – policy missteps, data surprises, external shocks – mean investors should stay on guard.
Considering the macro cooldown, Fed optimism, earnings strength, and those rising yield/seasonal risks, the balance of factors over the next three days skews cautiously. The market may struggle to advance decisively in the face of event risks and recent volatility, and a bit more consolidation or downside is possible before the next leg higher (if any) can materialize.