U.S. equities remain close to record levels, with the S&P 500 at 7,711.76—just 1.3% below its all-time high—while posting a 12.1% year-to-date gain. The NASDAQ Composite has advanced 12.4% in the same period, and the Russell 2000 small-cap index has surged 19.3%, extending its one-year return to 25.6%.
Macroeconomic conditions are tightening, with sticky personal consumption expenditures inflation holding at 3.7%. Federal Reserve Chair Warsh’s hawkish remarks at Jackson Hole heightened expectations for a September rate hike, with fed funds futures now pricing a 60% probability—up from 35% prior to the speech. The two-year Treasury yield climbed to a one-month high of 4.34%, reflecting shifting policy expectations.
Geopolitical risks are also pressuring markets after Brent crude oil prices breached $90.60 per barrel following a 3% single-session jump, driven by U.S. strikes on Iranian positions in the Middle East. Volatility, as measured by the VIX, edged up 6.6% to 15.38, though it remains below elevated levels.
Valuations show signs of compression, with the S&P 500’s forward price-to-earnings ratio declining from 22x to 20x. Technical indicators suggest overbought conditions, with the monthly Relative Strength Index at 75.2 and the StochRSI at 90.9, levels typically associated with stretched valuations.
Bank of America’s updated strategy model projects median next-12-month equity returns of just 3% at current policy expectations, with a long-term annualized loss of 3% projected over the next decade. The bank favors large-cap value stocks in sectors such as oil and gas, metals and mining, banks, and insurance, while cautioning against media and IT services.
Historical seasonal trends indicate caution for September, which since 1950 has averaged a -0.3% return for the S&P 500, making it the only consistently negative month on the calendar.
Upcoming economic data includes the August jobs report on September 4, with expectations for a 58,000 increase in employment and an unemployment rate of 4.1%. The European Central Bank is also set to announce its rate decision on September 10, coinciding with a recent decline in the STOXX 600 index. The Federal Reserve’s next policy meeting concludes on September 16.
