A Dark Start for the U.S. Stock Market in September: A Storm of Interest Rates, AI, and Elections
Hello, everyone, and welcome to your financial news analysis. The recent trend in the U.S. stock market can be described in four words: a dark start.
Just over 10 trading days into September, the Dow Jones Index recorded the worst opening since the 2008 financial crisis, while the S&P 500 and NASDAQ also performed the worst during the same period in 2020. Many investors must be wondering: Is this the beginning of another market crash, or is it just a normal “autumn surge”?
Don’t worry. Let’s put aside the complex financial jargon and break down the logic behind these developments in plain language. The decline was not caused by a single factor, but rather by a combination of three major forces:
1. Old problems (interest rates),
2. New concerns (the impact of AI),
3. Political uncertainties (midterm elections).
Below, I will explain this market trend from five different perspectives.
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1. The Seasonal Curse and the “Psychological Shadow” of September
First, let’s provide some “psychological comfort” to the market. September is often referred to as “Black September” on Wall Street.
Why is September so difficult?
Historically, September is the only month in which the average returns for the four major U.S. stock indices (Dow, S&P, NASDAQ, Russell 2000) have all been negative. This is similar to the “seasonal flu” in weather patterns, where institutional investors adjust their portfolios and lock in profits, leading to increased market volatility.
Why is this year particularly alarming?
In addition to the seasonal factor, there’s a significant “psychological shadow” from the 2008 financial crisis. This Tuesday marks the 18th anniversary of the collapse of Lehman Brothers. In September 2008, the Dow Jones Index fell by 6%, and in October, it plummeted by 14%. Such memories naturally trigger fear among investors. When the stock market breaks below key support levels (such as the 50-day moving average), it brings back memories of 2008, exacerbating panic and selling.
In simple terms:
It’s like driving through a dangerous intersection that’s had accidents before. Even if the weather seems fine today, you’re more cautious because you remember the last accident, so you hit the brakes at the slightest sign of trouble. The market sentiment in September is akin to post-traumatic stress disorder.
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2. The Key Factor: Interest Rates – A Double-Edged Sword
If seasonality is the background noise, then the Federal Reserve’s monetary policy (interest rates) is the main theme driving this decline.
What’s happening?
Recently, the yield on 10-year U.S. Treasury bonds (a measure of the interest rate the government pays for borrowing) has risen to a high of 5%.
- For individuals: This means higher interest rates on savings, but also higher loan costs for buying homes and cars.
- For stocks: Especially for tech companies like Apple, Microsoft, and Nvidia, which have high valuations based on future growth expectations. When risk-free rates rise, investors ask, “Why take the risk of buying stocks when I can earn a stable 5% on bonds?” As a result, funds flow out of the stock market and into bonds, causing stock prices to fall.
What do experts say?
Kevin Gordon from Citibank notes that although wages are still rising and the economy is resilient, the “hawkish” Federal Reserve’s stance on raising interest rates to curb inflation is a major downside. Adam Turnquist, a strategist at LPL Financial, puts it bluntly: “The most critical factor right now is interest rates. The 10-year Treasury yield testing the 5% level is a problem for tech stocks, which are highly sensitive to interest rates.”
In simple terms:
Think of the stock market as a pool, and interest rates as the faucet controlling the flow of water. When interest rates were low, more money flowed into the pool (the stock market), raising its level. Now that rates have risen, a more attractive “bond pool” has opened up, and money has started to move there, causing the stock market’s level to drop. Tech companies, which rely on future growth, are particularly hit.
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3. The Turning Point of AI: From Faith to Doubt
This year, AI was a major driver of the stock market’s rise, with chip stocks like Nvidia soaring. But recently, the situation has changed.
What’s happened?
1. Leading companies are slowing down: AI giants like OpenAI have suddenly emphasized the need for greater safety in AI development and called for a slowdown in the pace of innovation.
2. OpenAI’s IPO cancellation: The market was expecting a huge boost from OpenAI’s listing, but it announced it wouldn’t go public this year.
3. Breaking the logic chain: The original market logic was: Fast AI model iteration → Increased demand for computing power → Surge in chip demand → Rising chip stock prices. Now, with AI companies slowing down, the market interprets this as a potential slowdown in chip demand and a decline in chip stock prices.
How do institutions respond?
Citibank downgraded the U.S. stock market, stating that a potential slowdown in AI development could undermine earnings growth forecasts. Wells Fargo is also concerned that reduced AI spending will erode corporate profits.
In simple terms:
It’s like a situation where everyone was rushing to buy a “miraculous weight-loss pill” that promised significant weight loss. Suddenly, the company owner announces a pause in research due to potential side effects. Suppliers that had stockpiled raw materials for chip production panic, fearing they might lose their investments. AI has gone from being a widely believed solution to a risk that needs to be carefully evaluated.
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4. Economic Cycles and Valuation Bubbles: Wells Fargo’s Cautionary Note
In addition to interest rates and AI, major institutions on Wall Street are also raising concerns about stock market bubbles.
What did Wells Fargo say?
1. Lowered target prices: They lowered the S&P 500 target from 7,950 to 7,700 points.
2. Economic cycle: They believe the U.S. economy has entered the second half of a cycle, and the good times are coming to an end, with valuation multiples likely to shrink.
3. Excessive expectations: Market expectations for corporate earnings in 2027 are 42% higher than historical averages, the highest since the 1950s.
In simple terms:
It’s like a restaurant that was doing well and was valued at $5 million because people expected it to earn $1 million next year. Now Wells Fargo says, “Don’t be so optimistic; it might only earn $600,000 next year, and the economy is uncertain.” When expectations are too high and reality doesn’t meet them, stock prices usually adjust downward.
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5. The Political Minefield of Midterm Elections
Finally, there’s the often-overlooked but significant factor of the November midterm elections in the U.S.
Why do elections affect the stock market?
1. Policy uncertainty: If the Republicans lose control of both the Senate and House, Democrats might introduce stricter policies targeting tech companies in areas like taxation, regulation, and data centers.
2. Data center challenges: Wells Fargo highlights that policies related to data centers could become a bottleneck for AI development. AI relies on large data centers, and government restrictions on data center construction could hinder its growth.
3. Oil prices and inflation: Political turmoil during the elections could affect energy policies, leading to fluctuations in oil prices and, in turn, influencing inflation expectations and the Federal Reserve’s monetary policy.
In simple terms:
The stock market fears uncertainty. No one knows what the new government will do to tech companies after the elections. For example, if they decide to tax AI companies more or restrict data center usage, it could severely impact tech stocks.
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Summary and Outlook: What to Do Next
The September decline is not a simple market crash but a test of multiple pressures:
- Short-term outlook: High interest rates, cooling AI expectations, and election uncertainties are creating significant downward pressure.
- Technical analysis: The Dow Jones breaking below the 50-day moving average indicates a weakening short-term trend, potentially leading to more significant fluctuations.
Historical context (2022):
The situation in 2022 was similar, with rising interest rates and high inflation causing a market drop. However, the turning point came in October when the market realized inflation was peaking and interest rate hikes were likely to slow down, leading to a new bull market.
Advice for investors:
1. Don’t panic and sell off your investments: Although the market looks tough in the short term, the U.S. labor market is still strong, and the economy has not yet entered a recession.
2. Watch for two key signals:
- Interest rates: Will the Federal Reserve signal a pause or even a shift to lower interest rates?
- AI developments: Will AI companies accelerate their research and development again? Will chip demand stabilize?
3. Be patient: As Citibank suggests, this setback may not end the bull market, but it could trigger more significant market volatility.
In one sentence:
The U.S. stock market is facing a triple challenge: the seasonal downturn, rising interest rates, and slowing AI development. Don’t rush to buy or sell; instead, closely monitor the Federal Reserve’s actions and the progress of AI companies. Wait for the situation to clear up before making any decisions.