Many investors think the way is clear for a year-end rally. Some, however, are urging traders not to count out a fourth quarter pullback. “Lots of people will say, ‘it’s like the market never sells off in the fourth quarter.’ If you have momentum going into the fourth quarter, you’re going to maintain it,” said Marta Norton, chief investment strategist at Empower Investments. “[Except] it actually does. … It never sells off until it does, right?” There’s reason for investor optimism. The Federal Reserve has shifted to easing interest rates; the worst of the tariff announcements has passed, and seasonals turn favorable in the fourth quarter. At the same time, the bull case for artificial intelligence remains intact, and Wall Street expects the One Big Beautiful Bill Act to be supportive of equities. Yet, the current valuations have some investors wary that the stock market is vulnerable. The S & P 500 is currently trading at a forward price-to-earnings ratio of 22, near the highest level since spring 2021. The benchmark is also trading near all-time highs. .SPX YTD mountain SPX year to date Norton expects that investors can take some profits off the table. She said she’s aware that the stock market can continue to rise on the strength of AI tailwinds, but expects it’s prudent for investors to rebalance into cheaper parts of the market. The S & P 500 wavered Wednesday as the AI trade ran out of steam. On Tuesday, the broad market index snapped a three-day win streak, as AI stocks such as Nvidia fell. A hint from Federal Reserve Chair Jerome Powell that the equity market may be overvalued also added to the market’s nerves. Norton sees two material risks to the stock market. First, any major event such as a the emergence of DeepSeek that knocks the AI thesis could have a sizeable impact on the stock market. After all, the “Magnificent Seven” stocks now account for more than one-third of the S & P 500. Second is any material weakness in the labor market, which remains tight in spite of softness in the recent data could also hurt the outlook for stocks. “If you get any material surprise on that front, I think you could just see some weakness,” Norton said. “It’s hard for me to say — given how the debt levels seem at corporate and household seem manageable, and consumers are hanging in there, and you have secular growth from AI — it’s hard to say that there’s going to be a fundamental break.” “But that doesn’t mean something out of left field couldn’t happen that just kind of deflate the equity market or take some of the momentum out of it,” she continued. “So, it’s more just being aware of that and resetting expectations for the possibility that things might not always just grind ever higher.” ( Learn the best 2026 strategies from inside the NYSE with Josh Brown and others at CNBC PRO Live. Tickets and info here . )
