The stock market has notched big gains since spring, with the S&P 500 and Nasdaq rallying over 25% and about 40% from April 8 through last week's highs.
The major indexes' gains have come in mostly a straight line; however, disappointing economic data, renewed tariff concerns, and ongoing Fed interest rate uncertainty did dent the rally late in the week.
The S&P 500 and Nasdaq tumbled 2.9% and 3.8% from their highs to close at about 6238 and 20650 on Friday after the Fed kept interest rates unchanged on Wednesday, and inflation and jobs data on Thursday and Friday disappointed.
The dips may not be too surprising giving August is historically a seasonally weak month for stock market returns.
Nevertheless, investors are likely wondering what could happen to stocks next following last week's swoon.
Wall Street analyst resets S&P 500 target
The S&P 500 was arguably in rarified air, given that it had reached all-time highs and its forward price to earnings ratio, a key valuation measure calculated by dividing price by earnings, was 22.4, according to FactSet—a level last seen when the S&P 500 peaked in February before a 19% tariff-fueled drubbing.
Few expect a repeat of that nearly bear market reckoning. Still, August has a dubious track record for lackluster returns, ranking 11th out of 12 months since 1950, with an average loss of 1.2% in post-Presidential election years, according to the Stock Trader's Almanac.
The poor seasonality and emerging headwinds, including lackluster jobs data, concerning inflation, and newly installed tariffs, aren't lost on BTIG Chief Market Technician Jonathan Krinsky.
In a research note delivered to clients this weekend, Krinsky pointed to a potential return of volatility through early October, when seasonal headwinds shift to tailwinds.
A key reason behind Krinsky's short-term concern is that the S&P 500 breached its 20-day moving average on Friday.
Many technical analysts use either the 20-day, or 21-day, moving average as a key short-term indicator. When the market is trading above it, gains often beget gains. When it's below it, it can mean trouble ahead.
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Krinsky thinks the S&P 500 could retreat to 6,100, which may happen more quickly than many expect. He pointed to last year, when the S&P 500 sold off by about 8% from high to low in the first few days of August.
“History doesn’t repeat, but it often rhymes,” said Krinsky. “A quick move back to 6,100 would be -5% from the highs and would likely be buyable initially.”
Krinsky isn't alone in pointing out that the time of year isn't great for equities.
“Post-election years tend to peak right about now and bottom in late October,” wrote Carson Investment Research analyst Ryan Detrick on X. “No, this doesn't mean it has to happen this time, but some seasonal turbulence would be perfectly normal.”
In addition to the seasonal weakness, Krinsky noted that utilities, considered a defensive stock market sector, have been rallying, recently notching 52-week highs.
He also sees a potential opportunity for software stocks, which have underperformed semiconductor stocks, to close the gap, given they tend to have done better than semis in August, outpacing them in 9 of the past 13 years.
What's setting up the potential buy-the-dip drop
Stocks initially headed higher early last week on the heels of better-than-expected earnings results from technology bellwethers Microsoft and Meta Platforms.
However, optimism faded on Wednesday, when the Federal Reserve chose to keep interest rates unchanged at 4.25% to 4.50%, disappointing many, including President Trump, who has been arguing for big cuts all year.
Related: Jobs report shocker resets Fed interest rate cut bets
Adding to investors' concerns, the Personal Consumption Expenditures index showed that inflation accelerated to 2.6% in June from 2.4% in May and 2.2% in April.
Many expect tariffs instituted in the spring are only now causing inflation to rise. It may worsen in the coming months following newly announced tariffs after the reciprocal tariff pause ended on August 1. President Trump announced a slate of tariffs ranging from 10% to 41%, including a 35% tariff on Canada, one of our top three trading partners.
Jobs data last week also suggests the economy is wobbling. The latest report from the Bureau of Labor Statistics showed just 73,000 jobs created in July, below the 100,000 expected.
Worse, the BLS had previously said the US economy created 147,000 jobs in June. It revised that figure down to 14,000. May's job numbers were similarly lowered to 19,000 from 144,000.
The significant revisions drew the ire of President Trump, who fired BLS Commissioner Erika McEntarfer after the report, saying the numbers were “RIGGED in order to make the Republicans, and ME, look bad.”
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