This year has been pretty decent for Wall Street, with the S&P 500 adding about 13% despite geopolitical woes, AI investment and payoff concerns, and rising rate worries. However, the fourth quarter draws the maximum investor attention as festivities during this period generate huge business for many industries. Chances of a hawkish Fed may be a drag, though.
The U.S. economy added 29,000 jobs in September 2026, falling short of economists’ expectations, which should ease Fed hike bets. Moreover, per Truflation, U.S. inflation stood at 2.26% (at the time of writing), less than the August consumer price index of 3.4%. It means that the Fed may not be in a hurry to enact further rate hikes ahead. Let’s delve a little deeper into the key events of this fourth quarter.
Key Drivers Likely in Q4
Holiday Season
The late October-December period embraces the key holiday season, which puts the spotlight on the performance of retailers. As loads of sales-boosting events — Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas — fall in this quartile, the sector generally sees a sales boost.
Sentiment normally remains strong in Q4, which is traditionally the strongest period for U.S. equities, averaging a 4.9% gain compared to a 3% average across all other quarters, per FactSet data, cited by Seeking Alpha.
Holiday retail sales are projected to grow this holiday season and surpass $1 trillion for the first time, though that growth is boosted by inflation, per Bain & Company. Sales are likely to grow by 4.5% this year.
The holiday spending is supported by higher tax refunds, which are up $43 billion this year, or 17% year over year, as mentioned on CNBC, despite the fact that most of the tax refunds were spent at gas stations.
The Mastercard Economics Institute expects the strongest holiday season in four years, with spending growth of 5.5% year over year.
Relief Rally Expected Post Midterm Election?
Since 1974, the S&P 500 has delivered an average return of just 1.7% from Aug. 1 through Election Day, per Charles Schwab. But markets normally see a “relief rally” in the months after an election. Since 1974, the S&P 500 has averaged a 5.7% return in the three months immediately following a midterm election, with 11 of the 13 years producing a positive return.
And in the six months following a midterm election, the S&P 500 has averaged a 12.4% return across the same years, with all 13 years showing positive returns, per Charles Schwab. All these historical data points indicate a potential rally (read: Midterm Takes Center Stage: What Does It Mean for Markets & ETFs?).
History Favors a Strong Finish
The market’s performance through August also offers a reason for optimism.
According to Schulze and his team, the S&P 500 has gained more than 10% through August on 28 occasions. In 25 of those years, the index advanced between September and December. That’s an 89% success rate, as quoted in the same Yahoo Finance article.
Strong Earnings
Corporate earnings remain one of the biggest reasons stocks have held up well this year. S&P 500 earnings jumped 52% year over year in the second quarter, giving investors a solid reason to remain optimistic despite higher interest rates.
Jeff Schulze, head of economic and market strategy at ClearBridge Investments, told Yahoo Finance that markets have been taking their cues from the strong earnings environment.
Investors should note that S&P 500 earnings growth has been strong over the past two years, but the current momentum stands out. Growth is accelerating and becoming increasingly broad-based across sectors, creating a supportive backdrop for stocks.
S&P 500 earnings are expected to grow 24.6% year over year in Q3, the eighth consecutive period of double-digit gains. The Q3 earnings are expected to be above the year-earlier level for 15 of the 16 Zacks sectors, with six sectors expected to enjoy double-digit growth.
4 ETFs to Buy
In this light, we highlight a few ETFs that could be great picks for the fourth quarter.
State Street Consumer Discretionary Select Sector SPDR ETF XLY
Consumers are in good shape for the holiday season 2026. A strong job market, which supports wage growth and rising household wealth, has pulled off decent spending all year.While higher-income households have likely led the way, spending has remained resilient across income groups.
Amplify Online Retail ETF IBUY
The current wave of digitization is favoring both ecommerce pure-plays and traditional retailers.Note that Cyber Monday falls in November this year, concentrating online shopping into one long weekend and making November an important month for retailers, per Mastercard. This puts focus on online retail ETFs like IBUY.
First Trust NASDAQ Technology Dividend Index Fund TDIV
Tech stocks have been major driving forces behind the market’s gains. Although concerns about AI valuations and investment levels are widespread, the tech theme is unlikely to lose ground. However, adding some dividend exposure within the theme could provide a defensive cushion for your portfolio.
Fidelity MSCI Communication Services Index ETF FCOM
AI is increasingly influencing everyday consumer behavior, with agentic commerce making it easier to discover products, compare options and find value. Mastercard Economics Institute data shows that AI power users—those with paid AI subscriptions—tend to spread their spending across a wider range of merchants, including smaller retailers, restaurants, specialty food stores and beauty services.
Meta’s Muse fits the agentic-commerce category, probably more directly than a generic AI consumer trend. Hence, Meta-Heavy ETFs like FCOM can be picked in this regard.
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This article originally published on Zacks Investment Research (zacks.com).
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