The US stock market is currently in one of the strongest phases at the beginning of recent presidential terms. Since the beginning of 2025, the US stock market has risen by about 30%, while the average return of the S&P 500 index in presidential election cycles since 2000 is only about 12%. However, with the arrival of September, seasonal factors are beginning to signal caution: over the past 25 years, the S&P 500 index has averaged a decline of 1.1% in September, and the average decline during US midterm election years is even higher at 1.7%.
Meanwhile, valuations have become significantly high. The S&P 500 index is currently around 7,209 points, while the implied fair value based on post-tax corporate profits since 1985 is only about 4,302 points, indicating a gap of about 39%; even after adjusting for inventory valuation adjustments (IVA) and capital consumption adjustments (CCAdj), the model’s implied fair value is only about 5,417 points, still about 25% lower.
With September's seasonal weakness and high valuations, what pressures does the US stock market face in the short term?
The next US midterm election will be held on November 3. Historical performance shows that from August to October before midterm elections, the US stock market often enters a phase of consolidation, and typically improves after the election. Current market-implied probabilities show that the Democrats have about an 89% chance of winning the House of Representatives and about a 51% chance of winning the Senate, making a divided government the baseline scenario.
However, the long-term performance of the US stock market still shows a clear upward tendency. Over the past decade, on average, each quarter of decline corresponds to about three to four quarters of increase; since January 2024, the S&P 500 index has recorded 10 quarters of increase and only 1 quarter of decline. Therefore, although seasonality and high valuations suggest the need for caution in the short term, historical performance still makes it difficult for the US stock market to easily turn bearish.
With US debt around $40 trillion, why do stocks and gold still hold appeal?
Beyond high valuations, another issue facing investors is the limited alternative assets. Current US debt has reached about $40 trillion, and if the long-term trend of the past 50 years continues, the debt scale would be around $25 trillion; the CPI index also exceeds the level extrapolated according to pre-2008 trends by about 18%. The persistent deviation of inflation and debt from long-term trends has further elevated the importance of protecting real purchasing power.
Since the economic recession of 2020, various asset performances have shown significant divergence, with US stocks and gold performing relatively strongly, while bonds have continued to come under pressure, and real estate has been dragged down by high valuations and rising mortgage rates. Meanwhile, based on the relationship between current nominal GDP growth and historical trends, the yield on 10-year US Treasury bonds may be closer to 6.0% rather than the current approximately 4.8%, indicating that bonds and real estate may still face certain pressures.
Overall, the seasonal weakness in September, the approach of midterm elections, and elevated valuations mean that the US stock market still faces adjustment pressures in the short term. However, in the context of debt and inflation remaining above long-term trends and limited alternative assets, stocks and gold remain relatively better at protecting purchasing power, while Bitcoin shares similar characteristics, although its market size and capacity are still limited for large institutions. If the market experiences short-term weakness in September or early October, it may actually create a relatively more favorable market environment.
The above viewpoints come from BIT on Target, Contact us to obtain the full report of BIT on Target.
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