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Q4 market outlook: Will stocks rebound?

Oct. 16, 2023

Most investors were glad to see the third quarter come to an end. Ultimately, markets gave way to weaker historical patterns and stocks moved lower due to persistently high interest rates and a challenging investment environment.

Overall, Q3 left investors in a sour mood. While it’s understandable why investors may let this pessimism seep into Q4 — there’s also substantial reason for optimism as the final quarter begins. Here’s a breakdown of headwinds and tailwinds, as well as our outlook for stocks in Q4:

Headwinds moving into Q4

After the S&P 500 Index hit its closing year-to-date high of 4,589 on July 31, stocks quickly spent the rest of Q3 moving lower. September — a month notorious for its historically poor market performance —  lived up to its negative reputation due to the following factors:

Stubbornly tight monetary policy impedes economic activity

The standout items that moved markets lower in Q3 centered around generally hawkish commentary from global central banks and, specifically, a higher-for-longer rate message from the Federal Reserve. Notably, fewer rate cuts projected in 2024 currently have investors starting to believe the Fed could turn the economy into a recession despite growing evidence that inflation is indeed cooling and economic activity is normalizing. We believe backward-looking data on business and consumer trends could complicate the Fed's policy trajectory. Given the recent backup in interest rates, elevated recession risks, corporate earnings crosscurrents and forecasts for weaker economic activity in Q4, a well-diversified/slightly defensive portfolio approach remains prudent for most tactical investors, in our view.

Challenging external environment continues

The investment landscape is clouded by stubbornly tight monetary policy, higher energy prices and weakening consumer trends. Plus, the resumption of student loan payments, an ongoing United Auto Workers strike and a potential government shutdown in November complicates the picture.

Tailwinds moving into Q4

While the above headwinds are unlikely to fade away at the start of Q4, there are reasons to remain constructive as the year winds down. Here’s the case for a strong Q4:

Seasonality factors are favorable for markets

Stocks are higher year-to-date and tend to finish positively in the final quarter when up this late in the year. In addition, seasonality factors should improve as the year ends, economic fundamentals remain sound and earnings growth is trending higher. Stocks entered October oversold. The push higher in interest rates has acted like a wet blanket on risk sentiment, and there are few identifiable near-term catalysts (outside of rates stabilizing) to incentivize the bulls off the sidelines. The Q3 earnings season could be one catalyst, but outlooks must remain constructive for the fourth quarter, which carries some downside risks. Until government bond yields stop moving higher and possibly see some mean reversion back lower, we believe stocks are susceptible to further selling pressure over the near term. 

Core inflation is improving

Core inflation metrics should trend lower in the fourth quarter, particularly for shelter costs, which are over 40% of the core Consumer Price Index. In our view, jobs should remain steady, and while we project spending patterns and economic growth to slow in the current quarter, it should remain positive.

Bearish sentiment lays the groundwork for a potential bounce back

Investor sentiment and professional portfolio positioning are very bearish presently, offering contrarian signals to those willing to stay patient and balanced. Notably, bond yields have quickly soared higher and stocks are technically oversold. Thus, stock and bond prices could be in store for a bounce higher sometime in Q4 if Fed messaging begins to sound less hawkish and earnings conditions do not disappoint expectations. For now, we believe a smart path forward for investors is to stay the course and avoid deviating from a well-established investment strategy. In our view, the next few months should provide more clarity on rate policy, economic conditions and earnings trends, which could help establish an investment roadmap heading into 2024.

Simply put, stocks are not taking too kindly to higher rates as the quarter kicks off. While it's difficult to time, and we won't pretend to know when markets will mean-revert, large spikes in rates and pressure across stocks should eventually subside. This could bring stock and bond buyers back into the market, which could help stabilize prices, even if it is just a temporary condition through year-end. 

The final quarter is historically a strong time for stocks

As the Ameriprise chart below highlights (and shown in the monthly volatility averages at the bottom of the chart), the percentage of weeks with +5%/-5% weekly moves in the S&P 500 tend to rise in August and crest around mid-to-late October, before falling lower into year-end. Translation: Large moves in the market, which tend to increase volatility, historically are lumped together in the late summer and early fall period. Yet, stocks are now in the October through December period, which is the strongest three-month stretch for equities on average during a calendar year. And while the percentage of large weekly moves in the S&P 500 tends to crest in October, the month as a whole tends to produce a positive return on average. 

Sources: American Enterprise Investment Services Inc. and FactSet. These figures are shown for illustrative purposes only and are not guaranteed. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

Bottom line: Will stocks rebound in Q4?

August, September and October historically produce large swings in the market, but that volatility tends to decrease as the year winds down. Historical patterns aside, investors need to feel confident the rate environment has peaked before stocks and bonds can stabilize and possibly see better trends in the months ahead. In the meantime, investors should look through the volatility and maintain balance across equities, fixed income, cash and alternatives in accordance with their risk profile and investment strategy.

As you think about the final months of the year, reach out to your Ameriprise financial advisor. In addition to providing a personalized perspective on your portfolio, they can also identify year-end strategies that may benefit you.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. 


Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.


The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. 


There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.


A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities. 


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Past performance is not a guarantee of future results.


An index is a statistical composite that is not managed. It is not possible to invest directly in an index.


Definitions of individual indices and sectors mentioned in this article are available on our website at in the Additional Ameriprise research disclosures section. 


The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.


The Consumer Price Index (CPI) is an inflation indicator that measures the change in the total cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly by the Commerce Department and is also commonly referred to as the cost-of-living index.


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