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In the market, as in the film, the suspense builds through slow, quiet scenes in the second act.
The stock market has performed well enough to survive August with an uptrend, due to low trading volumes and narrow index trading ranges.
The S&P 500 index is within 0.5 percent of its close three weeks ago. It has been slouching and in limbo in the two weeks since hitting an all-time high just above 7,800.
But the index remains within 2% of its all-time high, and the decline has kept it a few points above the high of its previous multi-month range.
Indeed, the outpouring of relief that greeted NVIDIA’s strong performance and bold guidance was dramatic. But for the week as a whole, the stock rose just 1.3%, back to where it was three months ago.
Semiconductor companies as a group maintained their “ideal” position and maintained the rebound path that had been in place since July.
In other words, the market has done its best to stay out of portfolio managers’ way.
Here we have come to expect discussions about the calm before the storm, late summer hurricanes, and the harsh realities of the September market.
Yes, as has been pointed out everywhere, September is historically the worst month of the year for stocks. But it’s not entirely clear what you’re meant to take away from this other than to keep your expectations in check – which is always recommended in my book. The appropriate course of action has become even more uncertain, given that most of the weakness of the midterm election year in late summer was more than recovered immediately.
Historical monthly return patterns vary widely. If stocks are already doing well for the year, like in 2026, September won’t be so scary.
If you go back 20, 80, or 100 years, the ranking of monthly performance will change dramatically. None of these ranges actually represent a statistically significant sample. And of course, this is all about calendar months and does not mean every 30-day slice of market history.
Vix, 10-year Treasury yield at key levels
Given all this, I would argue that the reason to be cautious now is not purely the turn of the month, but rather the fact that, much like the S&P and the August cicada, a variety of key market indicators are swirling around critical thresholds that, if crossed, could signal a change in the nature of the market.
The CBOE S&P 500 Volatility Index (VIX) fell below 15. Not surprising given the recent benign range and the clockwork mechanism in which sector rotation and low correlation suppress index-level volatility.
Still, by the age of 15, we are moving away from “comfortable stability” and toward the realm of “creepy complacency.” Historically, trading volumes during this period are fairly clearly skewed higher. For now, the VIX futures curve has a healthy upward slope for the coming months, but things could change quickly.
The 10-year Treasury yield rose above 4.7% again, in part in response to a clear message from Federal Reserve Chairman Kevin Warsh in Jackson Hole on Friday that he shares his view on short-term rates with the committee that they are a tool to combat stubborn inflation and may need to be used immediately.
As we discussed last week, there is no known tripwire level at which bonds yield kneecap stocks. Sudden increases in bond volatility tend to be more damaging to stock prices than steadily rising interest rates. (Just because everyone says it doesn’t mean it’s wrong.)
Still, uncertainty over the Fed’s next move may itself color the tape. After Mr. Warsh’s speech on Friday, the market’s odds of a rate hike in September are now slightly above 50%.
It’s a kind of “what if” that the odds are close to a coin toss within three weeks of the Fed’s decision. This is a proposal that can curb risk appetite, and may become a characteristic of the Fed, which has poor communication skills as it faces a situation where the economy is moving at two speeds: aggressive corporate capital investment and cautious housing and consumers.
Once again, the 10-year US Treasury yield of just under 5% is consistent with the current 5-6% nominal growth economy. It is not unusually far above the current federal funds policy rate.
But can you still be in a pinch?
Indeed, as many tech bulls point out today, the tech boom and full-employment monument of the late 1990s occurred with yields of 5% to 6%. However, at the time, 5-6% was considered a “low” interest rate.
As the bubble of the 1990s expanded, U.S. Treasuries entered a massive secular bull market that lasted more than a decade. The decade began with a 10-stock yield near 9%, and it was just below 8% in December 1994, eight months before Netscape’s IPO sparked an Internet stock frenzy.
The rise in yields towards the current 5% feels more onerous to the current investing generation, and most of the bonds issued in recent years are underwater in terms of price.
(On the bright side, buyers of high-quality bonds currently enjoy a decent nominal and real yield buffer, and a 1 percentage point decline in yields would mean their bonds would lose more in value than they would lose in an equivalent increase.)
Aside from yields pushing the upper end of the range, broad commodity indexes are climbing toward five-year highs, corporate bond spreads have narrowed markedly, and one of the strange risk appetite indicators I’m looking at — the relative performance of low-quality/undervalued Citi and defensive/expensive JP Morgan — is retreating toward breakout levels in early 2026. This ratio peaked just before the SpaceX IPO in June, when enthusiasm for Wall Street’s role in the AI trading craze was palpable.
A key feature of the turn into September, the third and final act of the year, is that analysts and investors begin to adjust their views about the coming year. With the corporate conference season in full swing, companies will need to revamp their revenue models from summer onwards.
The focus now is on how stocks will metabolize the inevitable slowdown in earnings growth from this year’s heroic, if exaggerated, pace. Charles Schwab pointed out last week that Nvidia and Micron together will deliver one-third of total profit growth in 2026, with the top 10 earners accounting for two-thirds.
Yes, the median company returned to profit growth, but the extent was less impressive. And the 15% gain in the equal-weighted S&P 500 is already accounting for most of it?
market thermometer
This index from John Kolovos of Macro Risk Advisors uses several data points to reflect both what investors say and what they do.
Commenting on the latest data, Kolovos said: “Overall, little has changed, but sentiment is overly bullish, with real-time market indicators showing relatively high complacency, while research data from Investors Intelligence and others shows there are too many bulls.”
around the street
Through a skeptical lens, prediction markets seek to launder the public’s reckless urge to gamble by presenting themselves as socially useful risk management venues.
The preponderance of sports betting on platforms, including in states that previously did not allow sports betting, does little to directly help this discussion. The same goes for frivolous contracts about what words public figures say.
But the contrarian political commentary and satire magazine Baffler published a long essay last week detailing how the now vibrant but sleepy insurance industry was born out of a similar enthusiasm for anything-goes bets (along with pricing marine cargo insurance) in London coffeehouses.
“While this insurance became essential to the conduct of international expeditions, not everything that was going on at Lloyd’s and the London insurance companies of the 18th century was so important to commerce. Some people would ‘insure’ the pope die as much as they would ensure that a merchant ship did not sink. In fact, bets on whether a person would live or die were incredibly popular. Gamblers bet on the fate of prisoners awaiting execution and celebrities.” People whose illnesses were reported in the newspapers. ”
Food for thought and a reminder that the speculative impulses needed to price the resulting economic risks are inseparable from the investor impulses.
Still, the proliferation of “perpetual futures” listed on some of the same emerging exchanges tied to established stock indexes and public and private stocks always reminds us of the “bucket shop” practices of the early 20th century. As I have pointed out several times on the air, Depression-era securities laws specifically prohibited such conduct.
The Wall Street Journal’s Jason Zweig explores its resonance here with a deft touch that takes a comprehensive view of financial history and highlights it.
market is closed
The analyst corps covering Nvidia is mostly enthusiastic. The consensus price target for the stock implies a 50% upside from here and a market value of $7.5 trillion. They simply chase impressive revenue and profit growth that is unprecedented at NVIDIA’s size while staring in disbelief at compressed valuations.
The stock is trading at less than 20 times expected earnings for the next 12 months and 15 times less than next year’s estimates. In terms of free cash flow, this is clearly the cheapest megacap.
What I’m reading here is that the market will refuse to pay a premium for earnings growth that could peak in the near term until the company proves over long cycles that it’s not a hit-driven hardware maker.
There are precedents that may be relevant in recent history. Apple’s valuation has fallen down a similar slope in the years since it first released the iPhone to great profits (it was itself cheaper in the early 2010s market than it is today).
The long-standing setbacks for Apple include constantly evaporating margins on high-tech devices and the commoditization of smartphones.
By demonstrating a smooth and reliable upgrade cycle, cultivating service-based revenue streams, and returning significant capital through share buybacks and dividends, Apple gradually freed itself from persistent valuation discounts.
Apple currently commands a likely high premium of nearly 30x P/E for AI’s protective properties against swings in sentiment and spending.
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