Wall Street Next Week: Markets Eye Washington Stalemate as Stocks Hover Near Record Highs

The looming U.S. government shutdown tops investors’ agenda next week, as markets enter a seasonally strong fourth quarter, with equities trading near record highs and earnings season set to begin later this month.

The shutdown, triggered by deep partisan divisions in Washington, threatens to delay the release of key economic data and could complicate the Federal Reserve’s outlook on monetary policy.

Few on Wall Street expect the deadlock to derail the rally that has lifted the S&P 500 (.SPX) by 14% to fresh highs. But with few major economic reports or corporate earnings due in the coming days, the Capitol Hill drama is likely to dominate investor attention.

“Almost every investor will be focused on the shutdown and the prospect of reopening,” said Mark Hackett, chief investment strategist at Nationwide.

The central concern is that a prolonged closure will choke off the flow of timely economic data. If the data drought extends for weeks, it could create uncertainty around Fed decision-making, given the absence of the government’s usual indicators, and weigh on growth the longer it persists.

For now, however, most investors see little reason to panic.

Strong Data and Earnings Outlook
Despite some softening in labor statistics, the U.S. economy has weathered trade headlines and tariff tensions relatively well, while corporate earnings have continued to underpin equity gains.

According to LSEG data, analysts on Thursday expected S&P 500 companies to post 8.8% earnings growth for the third quarter from a year earlier — up from 8.0% at the start of July.

“In my view, the lack of data weighs more heavily on bears than bulls,” Hackett noted.

Next week will provide an early glimpse of earnings season, with Levi Strauss (LEVI.N) and Delta Air Lines (DAL.N) reporting on Thursday. Hackett added: “The most likely scenario is that markets remain calm — largely treading water through the shutdown.”

Eddie Ghabour, CEO of Key Advisors Wealth Management, shared a similar view, projecting a shutdown of two to four weeks. “If our estimate proves correct and the economy receives additional stimulus through two more rate cuts, followed by the government reopening, we could see a powerful surge in both growth and stocks,” he said.

Investors will also gain more insight on Wednesday, when minutes from the Fed’s September meeting are released, shedding light on policymakers’ thinking as they cut rates.

Seasonal Tailwinds
For market bulls, history offers encouragement: the fourth quarter has historically been the strongest for the S&P 500, with an average gain of 2.9% and a high frequency of positive returns since 1928, according to LSEG.

“Despite key risks and the potential for near-term volatility, the evidence supports a constructive stance,” Keith Lerner, co-chief investment officer at Truist Advisory Services, wrote in a Thursday note. “As always, we’ll continue to follow the evidence.”

Meanwhile, strong momentum has helped blunt bearish sentiment. The S&P 500 notched its 30th record high of the year on Thursday.

“The shutdown will grab headlines,” said Sonu Varghese, global macro strategist at Carson Group. “But beneath that, the story is really threefold: positive seasonality, rate cuts helping to stabilize the labor market, and ongoing market momentum. We’re overweight equities and plan to stay that way.”