S&P 500 Defies History with Best September Gains Since 2013: What’s Fueling the Rally?

The S&P 500 has managed to surprise traders by delivering its most impressive September performance since 2013, securing a notable 2.1% gain on a total return basis.

This breakthrough marks not just a positive month but also breaks a five-year streak of disappointing September, as reported by Bank of America.

What's driving this optimism? Much of the credit goes to lower interest rates, which have had a domino effect across various asset classes.

Gold shone brightly, boasting a 4.6% increase, while long-term Treasuries managed to edge up by 2.4%, outperforming stocks. Even more encouraging for those holding investment-grade corporate bonds, these saw a rise of 1.9%, and cash yielded a modest 0.4%. Meanwhile, international equities were not left behind; although they trailed the S&P 500 in local currencies by a mere 1.6%, they outpaced it in U.S. dollar terms, climbing 2.7% as the dollar eased. The MSCI Emerging Markets Index jumped 6.4% in USD, with China leading the charge, boasting a whopping 23.5% surge—its second-best monthly performance ever.

As we reflect on the third quarter, the S&P 500's climb of 5.5% stands as its finest showing for Q3 since 2020. The real excitement, however, lies in the nuanced market dynamics; the S&P 500 Equal Weighted Index (SPW) soared by 9.4%, capturing its best Q3 performance since 2010. Remarkably, 67% of S&P 500 stocks outperformed the index during this time, a statistic that places it in the 98th percentile of historical breadth. To put that in perspective, historically, only 31% of S&P 500 stocks have outperformed the index.

On the sector front, Energy was the lone wolf, descending by 3.1%, primarily due to a 12.5% dip in WTI oil prices. Despite facing challenging fundamentals, Bank of America's commodity strategists highlighted that oil positioning has plummeted to its lowest levels since 2011. Conversely, sectors sensitive to interest rates basked in success, particularly Utilities and Real Estate, which surged by 18.5% and 16.3%, respectively. Industrials and Financials, not to be outdone, also posted solid gains of 11.2% and 10.2%.

When it comes to growth versus value, the Russell 1000 Growth Index edged ahead with a 2.8% rise, overshadowing the Value Index's 1.4% increase in September. However, the storyline flipped in the third quarter, with Value stocks outpacing Growth ones for the first time since late 2022 (9.4% versus 3.2%). Following the Federal Reserve’s recent 50 basis-point cut, the Russell 2000 underperformed its larger counterpart, the Russell 1000, for September but led the way in the quarter, spurred by a robust July rally.

Despite these encouraging figures, a note of caution rings out from the strategists at Bank of America. They advise a measured approach towards small caps, indicating a preference for mid-cap stocks, which outperformed both large and small segments last month. Historically, mid-caps tend to lead during economic downturns after the onset of Fed rate cuts and currently benefit from favorable revision and guidance trends.