Is the outlook on the stock market improving?

The Western stock markets have experienced a difficult few weeks recently. Yet beneath the surface, change appears to be afoot – as more and more shares are reaching their highest price in a month. Does this positive sign hint at a stronger fourth quarter?

Rising interest rates, high petrol prices and doubts surrounding the huge investments in artificial intelligence (AI) ensured that prices continued to tread water. As a result, there has been little fun to be had on the Western stock markets in recent weeks.

Looking at things from a historical perspective, however, reveals that the stock markets are in a favourable period at present. The US S&P 500 index, which continues to serve as the benchmark for the rest of the world, generally performs at its best in the last three months of the calendar year. The poor performance seen in the first weeks of October suggesting that the favourable seasonal effect will be missing this year is a conclusion that seems a little premature in our view. Despite the disappointing price developments, there is a significant positive sign waiting below the surface.

On Thursday 22 October, the S&P 500 fell by more than 1%. However, half of the shares in the index reached their highest price seen in the previous 20 trading days on 22 October – and that is a remarkable achievement. It also suggests that the situation is improving below the surface, and more and more shares appear to be starting to reverse the trend.

Graph 1 illustrates this development. The upper part shows the development of the S&P 500, which has flattened out somewhat since the summer months. The lower part tracks the shares that have reached their highest price over the previous 20 trading days. The green circle indicates the status on Thursday 22 October.

Graph 1: S&P 500

Source: The Daily Number – Grant Hawkridge

This sign indicates that a stock market recovery is imminent. In fact, more and more shares are putting their falling trend behind them and starting to rise. Such a broader participation is often the precursor to a widespread recovery.

The weakness of Thursday 22 October was particularly evident in the technology sector. Investors are asking themselves whether the current wave of investment in artificial intelligence is going too far. Technology is still the most important sector in the S&P 500, with a weighting of more than 35%. As a result, price falls in this sector leave their mark on the index.

It is therefore a positive that other sectors take the lead when the technology sector falls a little. This healthy rotation often remains under the radar, precisely because of the dominant technology weighting in the US benchmark index.

Conclusion

In short, the various price rises within the S&P 500 indicate that the malaise seen on the stock market in recent months may be on its way out. More and more shares are showing an upward trend.

Will the fourth quarter live up to its reputation as the strongest quarter on the stock market in 2026, too? That could very well be the case.