The Federal Reserve raised interest rates on Wednesday for the first time since 2023, and the S&P 500 (SNPINDEX:^GSPC) finished that session around 7,550 — still up approximately 10% for the year, yet roughly 3% below the record high set in mid-August.
In other words, investors head into October with a fresh source of concern. And yet the calendar is about to turn to what has historically been the market’s strongest stretch of the year.
Since 1985, the S&P 500 has risen between the end of September and the end of December in 34 of 41 years, delivering an average fourth-quarter gain of about 4.4%. No other quarter comes close.
Should an investor heading into October do anything about that?
Image source: Getty Images.
The strongest quarter
The pattern is neither new nor a quirk of one fortunate stretch. Measured from each September’s final close to December’s, the fourth quarter has been the S&P 500’s best for decades. Since 1950, the index finished the quarter higher in 61 of 76 years (80% of the time), with an average gain of roughly 4.2%. The first and second quarters each averaged about 2% over that span, while the third quarter averaged less than 1%. Moreover, the typical fourth quarter was even stronger than the average suggests, posting a median gain of approximately 6% since 1985, because a handful of poor years drag the average downward.
This year’s setup doesn’t argue against the pattern, either. Since 1950, the index has entered the fourth quarter up 10% or more for the year on 31 occasions, and it finished those quarters higher in 26 of them. Momentum, in my view, has never historically been a reason to sell.
As of Wednesday’s close, 2026 appears poised to join that group.
When the quarter misses, it misses big
The S&P 500 has finished the fourth quarter lower seven times since 1985. Four of those declines — in 1994, 2000, 2007, and 2012 — were single-digit dips, the kind long-term investors barely recall.
The other three were a different story entirely. The fourth quarter of 1987, which encompassed that October’s crash, cost the index about 23%. The fourth quarter of 2008 arrived in the depths of the financial crisis and lost roughly 23% as well. And the fourth quarter of 2018 fell about 14%.
Notice what the big three share in common: none of them collapsed because of the calendar. Each failed because something significant broke — a one-day crash, a credit crisis, or a Federal Reserve tightening cycle that ran into year-end.
Notably, the index entered the fourth quarter of 1987 up more than 30% for the year. Powerful momentum provided no shelter when it mattered most.
What should investors change?
The 2018 case is the one to bear in mind this year, because the conditions look similar. On Wednesday, the Fed raised its benchmark rate to a range of 3.75% to 4%, its first increase since 2023, and indicated that inflation remains elevated. Its updated projections also left room for another hike before year-end.
The last time the fourth quarter went badly wrong, the Fed was likewise raising rates as the year wound down, including an increase in December 2018 delivered late in that quarter’s slide. That quarter was especially punishing for technology companies. The Nasdaq Composite (NASDAQINDEX:^IXIC) fell about 17% over those three months.
Of course, the 2018 decline had more than one cause. But a tightening central bank sat near the center of it, and that same variable hangs over the quarter that starts on Oct. 1. If the Fed follows through with another increase before year-end, this fourth quarter could face comparable pressure.
Even so, I wouldn’t shift capital around on the basis of a seasonal record. The history represents a set of probabilities — roughly four wins in five — never a guarantee.
After all, the only way investors could ever capture the 34 winning quarters was by remaining invested when they arrived, and the seven losing quarters were arguably impossible to foresee in real time.
Nor would I read a verdict on the market’s valuation into the pattern. Stocks don’t become cheaper simply because a historically strong quarter is about to begin.
The S&P 500 enters this October at more than 25 times earnings, well above its long-run average. A good quarter, if it arrives, will start from that valuation.
So, is the market’s best quarter about to start? Probably, if the last 76 years are any guide. But that’s just a forecast. And for investors already in the market, I believe the record is largely a reason to stay the course. I’d keep holding through whatever the quarter brings, pricey growth stocks included. And I wouldn’t time a single purchase to the calendar.
