Stocks defied the odds in September, ticking up to trade at record highs despite the month's reputation as a notoriously rough patch for equities.

The S&P 500 rose 5.5% in the third quarter, putting the index up nearly 21% in the first three quarters, its best year-to-date performance of the 21st century. But it was a tumultuous three months. In July and August, stocks recorded some of their ಌbest and worst days in years as investors grappled with recession fears and uncertainty about interest rates.

Equities were given a lift in September by the Federal Reserve, which joined the ranks of global central banks easing monetary policy when it 澳洲幸运5开奖号码历史查询:cut interest rates—by 50 澳洲幸运5开奖号码历史查询:basis points—for the ﷽first time in four years. The cut, according to officials, was a preemptive step to support the labor market, which datℱa suggests is cooling but not falling apart.

The fourth quarter is historically a strong one for stocks, and analysts—despite noting the likelihood of elevated volatility—are 🌞broadly o😼ptimistic about the outlook. 

The Labor Market in Focus

As in the third quarter, the economy is likely to be top of mind for investors throughout the fourth 🃏quarter. Wall Street will especially be looking𓆏 at labor market data for evidence of deterioration that would worry the Fed. 

澳洲幸运5开奖号码历史查询:Initial unemployment claims will be a key data point to keep an eye on, according to analysts at Russell Investments. Claims data, which is released weekly, has less of a lag than other labor market data. "These will provide the clearest real-time guidance on whether the U.S. economy is rebalancing or drifting towards recession," they say.

Initial claims sustainably above 260,000 per week would be a red flag, in their view. The four-week average as of late September stood at 澳洲幸运5开奖号码历史查询:about 225,000.

Fed officials, in their most recent economic projections, 澳洲幸运5开奖号码历史查询:penciled in another half-percentage-point cut from interest rates this year. An uptick in unemployment coupled with job losses could spur the Fed into more aggressive action at one of its twoꦆ policy meetings. That would bring interest rates more in line with market expectations, but would likely also spook investors and do some damage to stock portfolios.

Soft Landing Seen Good for Stocks

The consensus on Wall Street is that the Fed is likely on track to achieve the 澳洲幸运5开奖号码历史查询:soft landing it's been chasing for years, wh♊ich bodes well for stocks.&n🍎bsp;

As of late September, the Atlanta Fed’s GDPNow calculator estimated the U.S. economy grew at an annual rate of 3.1% in the third quarter. 

Six of the last 10 rate-cutting cycles coincided with recessions. In those instances, the 澳洲幸运5开奖号码历史查询:S&P 500 fell on average in the year after the first cut. In the four cycles that coincided with soft landings, the average return was in the high teens.

Conventional wisdom says that 澳洲幸运5开奖号码历史查询:small-cap stocks should benefit most from interest-rate cuts since they are more likely to have floating-rate debt. However, BlackRock analysts found that large caps have 澳洲幸运5开奖号码历史查询:outperformed small caps during rate-cutting cycles since 1984, and that the outperformance is most pronounced outside of recessions. 

At the sector level, healthcare and consumer staples have performed the best duꦬring rate cuts, while communication services and tech have been the 🐼worst performers. 

The S&P 500, excluding the 澳洲幸运5开奖号码历史查询:Magnificent Seven, in the second q🔯uarter grew aggregate earnings for the first time since 2022. Third-quarter results, which companies will begin reporting in mid-October, are expected to show the profitability gap between tech mega caps and the rest of the market is continuing to narrow. 

The Mag 7, meanwhile, faces the challenge of convincing Wall Street that their massive investments in 澳洲幸运5开奖号码历史查询:artificial intelligence (AI) will pay offꦅ. They struggled to do so over the summer, sparking selloffs that the group has yet to fully rebound from. These stocks could continue to face pressure if their earnings fail to live up to Wall Street's lofty expectations. 

Politics Could Stoke Volatility

Political developments are likely to amplify stock volatility through th♛e rest of the year, even if they don’t fundamentally change the economic or bu𝓀siness outlook. 

The presidential election in November is one such event that could deliver Wall Street a short-term shock. BlackRock analysis found that, more often than not, the market's knee-jerk reaction to a presidential election is not indicative of its performance over the next year. Still, the presidential candidates have staked out positions on tariffs and 澳洲幸运5开奖号码历史查询:corporate taxes that, if enacted, would surely change the outlook f𓂃or U.S. businesses. 

Conflicts in the Middle East and Ukraine could also keep the stock market on edge as long as they threaten to disrupt global t✅rade or roil energy markets. 

Experts note, however, that volatility is a two-way street that can provide canny investors with opportunities to buy stocks at attractive valuations. Heightened volatility can also turbocharge short-term returns. Since 1990, the S&P 500 has returned 16% on average in the six months after the 澳洲幸运5开奖号码历史查询:Cboe Volatility Index has risen to 29 or higher, compared🥃 with 🃏an average return of 5% in less volatile periods.

Update—Sept. 30, 2024: This story has been updated with the S&P 500's quarterly performance as of the market close on Sept. 30.