Scorching Summer Surges and Affected Financial Markets
The S&P 500 has shown a mixed seasonality trend during the summer months, according to historical data. July, traditionally one of the better months, has a median return of around 1.3% and a positive outcome about 65% of the time. However, August and September exhibit much weaker performance, with average returns near 0.2% and 0.4%, respectively, and about a coin-flip chance of finishing positive.
In August, the S&P 500's median return is 0.2%, making it a very flat month. The odds of it finishing positive or negative are roughly even, and volatility is relatively low. September, while slightly better than August (with a median return of 0.4%), still shows a weak seasonal trend.
Comparatively, months like November offer higher return chances, with about an 80% chance of positive returns, and stronger gains. The summer period, particularly late summer and early fall, often marks a seasonal trough or sideways trading on average.
Despite a calm market environment, there are mounting question marks on various fronts such as global growth trajectory, earnings, tariffs, Trump's fiscal policy, and geopolitics. The One Big Beautiful Bill Act (OBBBA) has been passed, introducing potential tailwinds and headwinds for markets. The OBBBA's large-scale spending commitments have prompted concerns about upward pressure on inflation expectations.
The S&P 500 Index has reached repeated all-time highs, but consensus EPS growth expectations for Q2 earnings season remain muted. The removal of political uncertainty around the OBBBA is a strong positive for markets, but the interpretation of its effects will evolve over time. Fiscal tailwinds from tax cuts are expected to boost corporate profits first, followed by better top-lines if consumption accelerates.
The net fiscal impulse could exceed $100bn for the remainder of 2025 and top out at $270bn in 2026, before tapering off to $9bn by 2029. Solar and other sustainability-related stocks have surged following the passage of the OBBBA due to less feared rollbacks to tax incentives and China's curbs on solar production.
Trump has threatened to impose tariffs on countries that continue to do business with Russia. The EU, Canada, and Brazil are now facing tariff rates between 30 and 50%. The Budget Lab at Yale forecasts a moderately growth-positive impact of the OBBBA in the short term, but anticipates GDP to be roughly two percentage points lower than the baseline by 2050.
Long-term investors should not fear, but embrace, short-term volatility. Recession odds have receded sharply, earnings expectations are low, and secular market trends are robustly pointing upwards. The UK recorded its warmest spring on record, and by mid-July, Europe had already experienced its third heatwave of the year.
In a contrasting note, markets have excelled despite the mounting question marks. However, as we move into the late summer and early fall, investors may want to exercise caution due to the historically subdued returns and potential volatility.
Investors might find it beneficial to tread carefully during August and September, as the S&P 500 exhibits a weak seasonal trend in these months, with low returns and relatively even chances of finishing positive. Given the upcoming period, and with various uncertainties in the global economy, such as inflation expectations, trade tariffs, and fiscal policy, there may be potential opportunities for strategic investing in financial markets.
