Why a September Pullback in the S&P 500 Is a Setup, Not a Signal

Why a September Pullback in the S&P 500 Is a Setup, Not a Signal

• Intra-quarter lulls tend to lead to increased volatility.
• September stands out as the weakest month of the year.
• Positive third quarter EPS guidance was higher than normal.

When earnings go quiet, speculation gets loud—and September volatility follows…

After more than two decades working with institutional investors, you start to notice the market’s rhythms—especially the uneasy silence between earnings seasons. That one-month gap, from late August to early October, is deceptively volatile. With corporate news drying up, speculation fills the void. And when speculation takes the wheel, investor judgment often takes a back seat.

This current lull is one of the most precarious of the year. Fund managers return from summer travel to find markets that rallied in their absence. But as they settle back in, fiscal year-end looms large. Often, many begin unwinding positions—not because of macro shifts, but to raise cash and reset portfolios for the year ahead. The result? September consistently delivers the worst monthly returns for the S&P 500 Index.

But the story doesn’t end there.

As the month winds down, institutional focus sharpens. Earnings season kicks off by mid-October, and for firms with September or October fiscal year-ends, it’s go-time. Capital gets redeployed. Risk appetite returns. And the market’s tone shifts from caution to conviction.

This September isn’t breaking tradition. Over the past three months, the S&P 500 has climbed 9.3%—and now the usual chorus of doubt is growing louder. Critics point to soft earnings from Dell and Marvell as evidence that the growth narrative is cracking. But that’s a narrow lens. Those two are just slivers of the broader tech landscape. And based on overall second quarter results and outlooks, the stock market is headed even higher over the coming year.

But don’t take my word for it, let’s look at what the data’s telling us…

Coming into the second quarter, analysts slashed earnings estimates by 4.2%—a deeper cut than the 5-, 10-, and 15-year averages. Wall Street expected just 4.8% earnings growth. But with 98% of S&P 500 companies now reported, actual growth sits at 11.9%. Roughly 81% beat both earnings and revenue expectations. That’s not a slowdown—it’s a surprise rally.

Forward guidance confirms the trend. After reporting numbers, 52 companies issued positive EPS guidance—above both the prior quarter (51) and the five-year average (44). That’s meaningful. Because, by the time companies report second quarter results, they’re halfway through the third quarter. If they’re raising numbers, management teams are feeling confident about the back half of the year.

One of the biggest drivers? Demand for AI infrastructure.

Oracle’s second quarter cloud infrastructure revenue surged 52% YoY, fueled by insatiable AI demand. Microsoft and Amazon echoed similar themes, with both struggling to keep up with enterprise appetite for AI compute. Oracle Chair Larry Ellison even noted a customer willing to buy every data center the company could build—a statement he called unprecedented in his 48-year career.

The “Magnificent Seven” tech giants—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—posted earnings growth of 26.6% in Q2, beating expectations by 10.5%. That compares to just 7.7% for the rest of the index. And analysts still expect double-digit growth from these companies for each of the next four quarters.

That strength is lifting forward earnings estimates. According to FactSet, the consensus CY2026 S&P 500 EPS estimate has risen from $301 in late June to nearly $304 today.

Remember, we want to invest today based on what earnings potential will look like 12 months from now. And considering it’s September, there are just under four months left in the year. By the end of December, the S&P should be trading based on the CY2026 earnings estimate. So, we want to think about a target for the index by year end.

Now let’s apply a suitable price-to-earnings multiple to estimate fair value. Considering roughly 35% of the S&P 500’s weight is technology, I believe we should use a blended multiple: 30x for growth and 19x for the rest. That gets me to a weighted fair-value multiple of roughly 23x earnings. Multiplying our fair-value multiple by the forward 12-month earnings estimate of $303.88, I get to a price target of just under 7,000, or 9% higher from current levels.

Like I said at the start, the market’s quietest month often sends the loudest signal. September may be fraught with volatility and skepticism, but beneath the surface, the data is speaking clearly. Earnings strength, resilient guidance, and AI-fueled demand are laying the foundation for powerful earnings growth. With forward estimates rising and institutional capital gearing up to re-engage, investors would do well to look past the seasonal chop and focus on the setup ahead… a steady rally in the S&P 500.

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