Wall Street’s Shock September Surge: Can October Earnings Keep the Rally Alive?

September tore up the calendar playbook and rewrote market expectations. The S&P 500 rose 3.53%, the Nasdaq surged 5.61%, and the Dow added 1.87%, delivering the strongest September for the S&P and Nasdaq since 2010 and the best September for the Dow since 2019. The Dow finished at a record high. For the quarter, the S&P gained 7.79% (its best third quarter since 2020), the Nasdaq jumped 11.24% (best Q3 since 2010), and the Dow added 5.22%. September also marked the S&P’s fifth consecutive monthly gain and the Nasdaq’s sixth. That momentum was powered by investor enthusiasm for artificial intelligence, a Federal Reserve perceived to be back on a cutting path, and easing front-end yields—all of which outweighed the noise from shutdown headlines in Washington.

September in Review: Strength with Caveats

The rally was led by mega-cap growth stocks. The S&P 100 outpaced the broader S&P 500, while the Nasdaq and Nasdaq 100 topped all major indexes. Breadth improved compared with August, but the gains were not truly broad. The Russell 2000 rose 3.17% after a weak August, but midcaps barely moved, with the S&P 400 up just 0.29%, and the Value Line Average added only 0.48%, underscoring how much cap-weighted leaders did the heavy lifting. Dow Transports slipped 1.19%, leaving Dow Theory purists cautious. Still, the historical pattern is supportive: five straight months of gains in the S&P usually tilts bullish for the year ahead.

Sectors showed a clear tilt toward growth and rate-sensitive groups. Technology (XLK +7.5%) and Communication Services (XLC +6.0%) led the way on AI and data-center spending strength and resilient ad/platform trends. Utilities (XLU +4.1%) benefited from lower yields, while Consumer Discretionary (XLY +3.6%) got a boost from easier borrowing costs. On the flip side, Materials (XLB -2.4%) and Staples (XLP -2.3%) lagged alongside Energy (XLE -0.3%) and Financials (XLF -0.1%). A stronger dollar, softer commodity pricing, and murky net interest income outlooks weighed on those corners.

Factor performance reflected a clear bias. Large-cap Growth and Momentum surged (+5.2% and +4.1%), while small-cap Value (+1.4%) edged out Small Growth (+0.6%). That was a faint cyclical tell, though it was undercut by weakness in small-cap Low Vol and Quality factors (-1.9%). Midcaps were stuck in neutral, with the core index up just 0.4%. Investors were content to cluster around big-cap leadership.

Macro Backdrop: Fed and Policy Still in the Driver’s Seat

Rates set the tone. The two-year Treasury yield dropped to about 3.6%, while the 10-year held near 4.15%. A front-end rally on Fed-cut expectations—markets priced in another 50 basis points of easing this year—provided tailwinds to duration assets. Shutdown risk was treated as noise. Investors noted history: markets often grind higher through prolonged standoffs, and this one so far was no different.

Cross-asset moves underscored the lower real-yield theme. Precious metals ripped higher, with silver up 17.4% and gold up 11.7%, while copper rose 6.1% on signs of capex stabilization and firmer China demand. Oil prices softened, with WTI crude down 2.3%, while natural gas spiked 11.3% on seasonal and storage dynamics. In crypto, Bitcoin gained 5.1% on a store-of-value bid, while Ethereum fell 4.8% as platform beta lagged. The dollar was flat, meaning metals’ rally was more about real rates than FX shifts.

Beneath the surface, AI remained the dominant micro theme. The supply chain upcycle benefited semiconductors, memory, equipment, and server OEMs, while high-multiple software names trailed. A quality tilt was evident within the risk-on trade: IBM, UnitedHealth, and Walmart worked while lifestyle and consumer premium brands wobbled. Cyclicals offered mixed signals: Industrials were steady, but Materials and Energy lost ground in step with commodities.

Looking Ahead: October’s Test

The calendar turns to October with a very different challenge. Earnings season looms, and the critical question is whether the earnings breadth will broaden beyond mega-cap AI leaders. Investors will be watching margin resilience and forward guidance across a wider range of companies. The second half of the year’s rally has been fueled by a narrow leadership core; October will test whether earnings support can expand that base.

Another key tell will be the Transports versus Industrials dynamic. September’s divergence left Dow Theory traditionalists cautious. If Transports confirm with strength, it could reinforce confidence in the rally’s durability. If not, the message will be one of fragility in cyclicals.

Rates and the dollar remain the other big swing factors. More relief in yields could unlock a long-awaited catch-up move in small and mid-caps, while a re-tightening would reassert large-cap dominance. Investors will be parsing every Fed communication for signals on whether cuts remain on the table in November and December.

Finally, the political backdrop remains a wildcard. Shutdown headlines were treated as background noise in September, but prolonged uncertainty could eventually weigh on sentiment. Combined with the upcoming election cycle, regulation-heavy debates on technology, energy, and tariffs could reinsert policy risk into equity pricing.

Bottom Line

September was a reminder that seasonality and conventional wisdom can be upended when liquidity, policy, and thematic growth drivers align. The AI trade, Fed cut expectations, and easing yields delivered a powerful boost that overrode historical weakness. But October brings a new test. Earnings breadth, cyclicals confirmation, and the path of rates will determine whether momentum continues or leadership narrows again. For investors, the message is clear: September was the sprint; October will decide whether the market has the stamina to finish the year strong.