The U.S Stock Market Cools as Earnings Season Looms and October Turbulence Looms

US stocks have managed to brush aside nearly every warning sign over the past five months, delivering one of their strongest streaks since the 1950s. This rally came even as investors worried about the health of the economy and the drag from tariffs.

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As the third quarter winds down, the S&P 500 is still on track for gains, though sentiment shifted slightly last week. The index slipped for three sessions in a row—the longest decline in a month before bouncing higher on Friday.

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Since the Federal Reserve cut rates on September 17, the benchmark has gained less than 1%, with weakness stretching across technology giants, consumer stocks, health care, and materials.

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Still, positioning data shows that traders are betting on a year-end surge. Volatility remains well below historical norms, and options markets reveal that investors are paying more to guard against a runaway rally than a steep selloff.

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That optimism has veterans on Wall Street urging caution. Risks are mounting. President Donald Trump recently revived trade tensions, announcing fresh tariffs on

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imported furniture, brand-name drugs, and heavy trucks. These new levies arrive just as the first round of tariffs is expected to show up in company earnings. Corporate reporting season kicks off October 14 with JPMorgan Chase, and forecasts for profit growth are already running high.

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Earnings will dominate the next five weeks, but other critical events loom. Jobs data due Friday will offer insight into the labor market after earlier weakness pushed the Fed to cut rates for the first time in a year. Another policy decision follows on October 29, with traders divided on whether strong consumer spending will convince officials to hold steady.

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Meanwhile, markets appear to be shrugging off the looming threat of a government shutdown on October 1, though the risk increases daily. And history isn’t helping sentiment: October has long carried the reputation of being the most volatile month for US equities.

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“I wouldn’t be surprised to see stocks take a breather and volatility creep higher in October,” said RaeAnn Mitrione, investment management partner at Callan Family Office. “After such a strong run, it’s unrealistic to expect gains to continue at this pace into the fourth quarter.”

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Some of the concern comes from unexpectedly strong economic data, which has clouded the case for further rate cuts. Markets had already priced in looser policy, and valuations are now sitting near levels seen in past periods of exuberance.

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Citi Research adds another red flag: investors appear to be assuming 8% earnings growth for the third quarter, with forward expectations at levels reached only twice in the last 30 years, just before selloffs in 1999 and 2021.

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“The real test for US equities is whether companies can actually meet or beat these lofty forecasts,” said Drew Pettit, US equity strategist at Citi. “Anything short of a strong beat-and-raise could be a trigger for profit-taking.”

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Seasonal forces may add more pressure. According to CFRA, October’s volatility has historically been 33% higher than the average of other months since World War II. Analysts often attribute this to “window dressing,” when mutual funds sell certain holdings before month-end to offset gains.

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Even so, this year’s rally has been nothing short of remarkable. After flirting with a bear market in early April, the S&P 500 has soared 33%, adding $15 trillion in market value and logging 28 record highs in 2025, Bloomberg data shows. The index has gained 2.8% so far in September, its best showing for the month since 2013 and is up 6.4% for the quarter, rising in seven of the last eight.

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The relentless climb since April has kept the Cboe Volatility Index under 16, suggesting traders don’t see turbulence ahead. In fact, demand for out-of-the-money call options has outpaced puts, according to Nomura strategist Charlie McElligott.

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But some experts warn that this bullish behavior could backfire. “No one is hedging right now,” said Andrew Thrasher, portfolio manager at Financial Enhancement Group. “Everyone’s chasing upside, which leaves the market vulnerable. If something unexpected hits, traders will rush to buy puts, and volatility will spike.”

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History offers some guidance. Since 1950, there have been six other instances where the S&P 500 advanced from May through September. On average, the index lost 0.6% in October but still managed a 3% gain in the fourth quarter, according to Carson Investment Research.

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Ed Yardeni, president of Yardeni Research, is leaning on that pattern. He sees the S&P 500 ending the year at 6,800, supported by a resilient US economy and solid third-quarter earnings. Yet even the long-time bull thinks a pullback would be healthy.

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“I wouldn’t mind seeing some selling pressure,” Yardeni said. “With valuations stretched and investors on edge about bubbles, a short-term correction could actually strengthen the market’s foundation.”

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