Buy the September dip in stocks as the market heads into the best 3-month stretch of the year, strategist says

• Nasdaq 100 and S&P 500 declines in September present a buying opportunity, says Ned Davis Research.

• Weak seasonality data and excessive pessimism readings suggest a strong 4th quarter rally is ahead, NDR said.

• NDR sees no signs of a sharp bear market, with positive earnings revisions and economic indicators.

A 6% decline in the Nasdaq 100 and 4% decline in the S&P 500 since the start of September represents an attractive buying opportunity for investors, according to Ned Davis Research.

The research firm said in a note on Friday that the weakness in stocks so far this month is more than typical, given weak seasonality data — but it’s also a big opportunity given the market is heading for its best three-month stretch of the year.

“With the September weakness relieving the optimism and sending sentiment indicators to excessive pessimism readings, equities would be likely to launch a persistent ascent similar to the first quarter advance, supported by fourth quarter seasonal tendencies,” NDR strategist Tim Hayes said.

He added: “Whereas a comparison of three-month declines shows that August – October has been the weakest, October – December has been the strongest.”

Hayes finds it encouraging that, based on internal NDR readings, the stock market, economy, and corporate earnings are showing no signs of being vulnerable to a sharp bear market decline akin to what happened in 2022.

Analyst earnings revisions continue to trend higher, historically a leading indicator for corporate earnings.

“As with revisions, economic performance is a leading indicator of earnings growth, currently supporting the earnings outlook. While the recession probability has risen from its lows of May and June, it hasn’t risen out of its bullish mode for equities,” Hayes explained.

Altogether, that means the current stock market decline is more likely to be a garden variety correction that ultimately proves to be healthy for the sustainability of the ongoing bull rally that began in October 2022.

“The current choppiness will prove to be just that, not the sign of a new bear market. It should lead to a buying opportunity within the continuing bull market, ahead of renewed rallying in the fourth quarter,” Hayes said.

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