Monthly S&P 500 forecast for October 2026
October 1st, 2026
Our monthly S&P 500 forecast for October is a 0.83 percent increase over the average of September 2026.
The model-based forecast takes into account the changes in oil prices and wages. However, a forecast model cannot possibly capture the full impact of uncertainty caused by tariff wars and geopolitical tensions, such as the war in the Middle East.
Self-Fulfilling Prophecy of the ‘September Effect’?
September is historically known as the worst-performing month in stock markets, with the S&P 500 index posting negative returns 56% of the time since 1928. Some of this seasonality has a reasonable basis. Investors try to reduce their tax bill by selling loss-making stocks, and fund managers quite often rebalance the asset mix of their portfolios after their holiday break. However, mostly any discernible impact has to do with behavioural biases of investors.
Despite the ongoing Middle East conflict and surging energy prices, the S&P 500 ended September flat over the end of August. The September average of the index was down 0.5% compared with the August average.
US economic indicators were generally good in September: a resilient labor market, strong (Q2) GDP and consumer spending growth, and steady inflation. What spoils the positive picture is rising energy prices and rising US Treasury yields. The recent sell-off in government bonds indicates that markets are not optimistic about inflation cooling further without further rate hikes.
Big Tech is under scrutiny
The 10-year Treasury yield rising above 5% for the first time since the global financial crisis has implications for the massive long-dated bond issuance by big tech funding their planned capex spending. Big Tech’s increased vulnerability to the pitfalls of debt financing is making investors more cautious concerning the tech stocks. If Big Tech struggles to pay back its bond obligations, the systemic risk to the US and global economy would be tremendous. High interest rates also reduce equity valuations.
Overall, investors are scrutinizing gross margins and earnings expectations more closely as their anxiety grows over a possible AI bubble-bust scenario.
As we stated before, although Big Tech’s ambitious AI CapEx carries some systemic risk, this is really the worst-case scenario. Unlike the 2008 financial crisis, Big Tech firms finance most of their AI investment with solid cash flows. Although the Fed lists AI as a top systemic risk to financial stability just behind geopolitical risks, this is because the sheer scale of AI investments affects US GDP growth.
As we enter October, quarterly earnings season for 2026 Q3 gets underway. Microsoft, Alphaber/Google, Meta, Amazon and Apple are expected to report in October. Markets will no doubt scrutinize whether cloud and AI capex are already generating better revenue growth to justify the high valuations.
PMI jumps, but consumer confidence deteriorates
The Chicago Purchasing Managers’ Index (PMI) jumped to 58.8 in September from 47.1 in August 2026. This was well above the market forecast of 51.2. The latest data pointed to a renewed expansion in business activity. After last month’s significant contraction, the latest expansion in business activity has been the strongest pace since May. The expansion was due to increases in production, new orders, and supplier deliveries.
The Conference Board’s consumer confidence index fell by 6.7 points to 81.9 (1985=100) in September, down from 88.6 in August. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—retreated by 7.9 points to 109.3. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—fell by 5.9 points to 63.6. This was a third consecutive monthly decline. The survey period for this month’s preliminary results was September 1-23.
Already in June, US consumers were feeling pessimistic about the prospects of getting a job. This was when the US-Iran ceasefire was in place. The ceasefire violation and the restart of the conflict contributed to the deterioration in consumer sentiment. Consumer appraisals of current business conditions became negative for the first time since September 2024.
Inflation remains steady, and Q2 GDP growth is revised up
The annual inflation rate in the US remained steady at 3.4 % in August. This was in line with market expectations. Despite the renewed conflict in the Middle East and rising energy prices, August’s inflation did not edge up. However, the lag effects of the elevated energy prices are expected to keep September inflation sticky.
Personal consumption expenditures (PCE), a key barometer of inflation and consumer spending, rose 3.4% in August on an annual basis, also steady with the revised down July (from 3.7% to 3.4%)
Core PCE, which excludes the more volatile food and energy categories, was also unchanged at 3% in August, as the July figure was revised down.
US Q2 gross domestic product (GDP) grew at an annualised rate of 2.2 per cent, revised up from the second estimate of 1,5 %, down from the revised 2.5 per cent growth in the first quarter. This was the final estimate for Q2. The reading was above economists’ expectations (Source: Bureau of Economic Analysis (BEA)).
Another rate hike in October?
The Fed’s target range for interest rates is 3.75% to 4% after the 25 bp rate increase in September.
Energy prices have increased about 28 percent because of the renewed hostilities in the Middle East since the end of June. Despite the steady August inflation, consumer prices will likely remain elevated till the end of 2026.
Fed Chair Kevin Warsh’s commitment to lowering inflation to the central bank’s 2% target would have lost its credibility if the Fed had left the rates unchanged in September. In the post-pandemic period, the Fed’s monetary tightening was criticised for being too slow and causing a prolonged period of elevated prices. It is unlikely that Warsh would repeat the same mistake. We believe if September inflation is up in October, the Fed may increase the federal funds rate by another 25 bp.
S&P 500 index is fairly valued
According to FactSet Insights from September 25, the forward 12-month P/E ratio for the S&P 500 is 19.2. This P/E ratio is below the 5-year average (19.8) but above the 10-year average (19.0).
For Q3 2026, the estimated (year-over-year) earnings growth rate for the S&P 500 is 29.1%. If 29.1% is the actual growth rate for the quarter, it will mark the third straight quarter of earnings growth above 25%.
Overall, the index is close to fair valuation, owing to high earnings forecasts, driven by the AI boom. Investors are realizing that company earnings potential cannot be judged by historical standards. Indeed, the AI revolution is increasing productivity and reducing unit costs of most companies in the S&P 500 index. However, a sharp revival of inflation and higher Treasury and credit spreads are the potential threats to this best-case scenario.
Our monthly S&P 500 forecast is a model-based fair-value estimate. Announcements of tariffs and cancellations cannot be captured in our model unless the impact appears in historical data. The possible impact of geopolitical tensions enters the model through keyword searches (Google clicks) and the advanced retail sales index. However, these variables perform better in normal times. Our quarterly S&P 500 forecast discusses these issues in more detail.
