Wall St Week Ahead: Markets Eye Washington Standoff as Stocks Near Records

NEW YORK: The US government shutdown tops investors' agenda next week as markets enter the seasonally strong fourth quarter, with equities near record highs and gearing up for an earnings-season test later this month.
A deep partisan rift in Washington has led to the shutdown, which risks delaying crucial economic data and could potentially cloud the Federal Reserve’s policy-easing outlook. Few on Wall Street expect the impasse to derail a rally that has lifted the S&P 500 by 14% to repeated record highs, but with little in the way of major data or earnings, Capitol Hill drama is set to dominate investor focus.
'The shutdown and the potential reopening... that's going to get almost all investor attention', said Mark Hackett, chief market strategist at Nationwide.
Investors’ main concern is that the shutdown could suspend the flow of timely economic data. A prolonged pause might create uncertainty about the Fed's monetary policy path, as the central bank relies on government data to guide decisions, while also potentially dragging on economic growth.
Despite some softness in labour data, the US economy has withstood trade and tariff pressures; and corporate earnings have supported stocks’ rise. Analysts expect S&P 500 earnings in Q3 to increase 8.8% from a year ago, up from an earlier forecast of 8.0% in July, according to LSEG data.
'In my opinion, lack of data actually puts more burden of proof on bears than it does on bulls', Hackett said. Investors will get a preview of the upcoming earnings season with Levi Strauss and Delta Air Lines reporting on Thursday.
Eddie Ghabour, CEO of KEY Advisors Wealth Management, who expects the shutdown could stretch two to four weeks, echoed the sentiment. 'If we get extra stimulus in the economy in the form of two more rate cuts and then the government is back in business, you’re going to see a huge re-acceleration of growth in the economy and equity markets', he said.
Investors will also get insight into Fed thinking when the minutes of the September rate-cut meeting are released on Wednesday.
The just-started fourth quarter is historically the S&P 500's strongest, with an average gain of 2.9% and a high proportion of positive returns, according to LSEG data dating back to 1928.
'Despite headline risks and potential short-term volatility, the weight of the evidence continues to support a constructive stance', said Keith Lerner, co-chief investment officer at Truist Advisory Services.
Market momentum has also kept stock bears sidelined. The S&P 500 logged its 30th record closing high of the year on Thursday.
'The shutdown is going to be the news, but the underlying backdrop is really three things: seasonality, tailwinds from rate cuts to protect the labour market, and momentum in the markets', said Sonu Varghese, global macro strategist at Carson Group. 'We've been overweight equities and continue to be so'. — Reuters