Ed Yardeni: What Could Possibly Go Wrong In September?

September has a long history of being a tough month for the stock market. This has been particularly true over the past decade, based on the average year-to-date percentage change in the SP 500 during Septembers (chart). But when September was weak in the past, it often provided buying opportunities for year-end rallies.

So, might the latest top in the SP 500 have been hit on Thursday, August 28, at 6501.86? Probably. Notably, Nvidia reported great earnings on Wednesday, yet the markets AI bellwetherstocksold off on Thursday and Friday. Then again, profit-taking before a long holiday weekend isnt unusual. Furthermore, the bull-bear ratios remain relatively subdued, suggesting that any pullback in September is unlikely to be a correction or the start of a bear market (chart).

However, the uncertain future of the Feds monetary policy (and even the Fed itself!) and now Trumps tariffs are likely to weigh on the stock market over the next few weeks. Overseas, France appears to be on the verge of a debt crisis that could topple the government, while Germanys manufacturing sector may be falling into a recession. Japans bond yields are soaring. Here is more:

(1)The Fed the economy. The CME FedWatch Tool indicated that the latest probability of a 25-basis-point Fed rate cut at the September 17 meeting of the FOMC is 86.4%. Our subjective odds are 40%. Fridays data supported our none-and-done-in-2025 stance based on our view that the economy doesnt need a rate cut, especially with inflation closer to 3.0%y/ythanthe Feds2.0%target.

Fridays personal income report showed a robust gain in consumer spending (0.5%) and a solid increase in personal income (0.4%), led by a substantial gain in private wages and salaries (0.7%) (chart).

Also on Friday, the Atlanta Feds GDPNow model tracked Q3s real GDP growth rate at 3.5%, up from 2.2% (chart)! It rose 3.3% during Q2.

2)The Fed inflation. Julys headline and core PCED inflation rates showed gains of 2.6% and 2.9% y/y in Fridays personal income report. The monthly increases in the core inflation rate have been rising for the past four months, led by the supercore inflation rate for PCED services less energy and housing (chart).

(3)The Feds independence. Also unsettling the financial markets will be the ongoing attack on the Fed by the Trump administration. The September 17 meeting of the FOMC is likely to confirm that the attacks are cracking the foundation of the Fed. If the majority votes to cut the federal funds rate or to hold off on doing so, there will be at least two dissenters either way, if not more. If the Fed cuts the rate even though the data dont warrant such easing, the Bond Vigilantes are likely to protest.

(4)Trumps tariffs.As we anticipated, a US appeals court ruled on Friday that most of President Donald Trumps tariffs are illegal. The court allowed the tariffs to remain in place through October 14, giving the Trump administration a chance to file an appeal with the US Supreme Court. If these Tariffs ever went away, it would be a total disaster for the Country, Trump wrote in a Truth Social post. If allowed to stand, this Decision would literally destroy the United States of America. The Bond Vigilantes might start acting up again if they can no longer look forward to a significant reduction in the federal deficit attributable to tariff revenues.

(5)European turmoil.France appears to be on the edge of a political and debt crisis. French markets tumbledafter Prime Minister Bayrou unexpectedly called for a confidence vote on September 8 to approve his debt-cutting plan. His proposal was roundly rejected by opposition parties, who said they would relish the opportunity to cut short his minority governments time in office.

Germanys industrial output fell in June to its lowest level since the pandemic in 2020, extending last years declines amid weakening foreign demand and increasing competition from China (chart).

6)Japans debt crisis. The Bond Vigilanteshave beenpushing bond yields up rapidly in Japan (chart). Inflation is rising. The prospect of fresh fiscal stimulus following the ruling coalitions defeat in Julys upper house election is raising concernsabout increased debt issuance.

7)Gold. No wonder that the price of gold seems set to climb to new record highs, perhaps reaching our year-end target of $4,000an ounce(chart).