Will the "Q3 Curse" hit the US stock market?

Report Summary

Q1: What are the seasonal effects of the US stock market in Q3? The probability of a correction in the US stock market in Q3 is not low, especially in August and September. Some underlying factors include liquidity tightening at the end of the fiscal year (corporate fiscal year settlements, government accelerated funding, etc.), political event windows (elections, etc.), a higher proportion of government bond issuance in Q3, and policy uncertainties related to the new fiscal year's scale.

Q2: What expectations are currently being traded in dollar assets? US Treasuries: weak but persistent interest rate cut expectations. US stocks: preemptive interest rate cuts and even recovery expectations.

Q3: What are the main risk points in Q3 this year? After the debt ceiling increase, the Treasury's replenishment of the TGA account has led to a wave of short-term debt issuance, combined with a relatively large amount of US Treasuries maturing in Q3, making liquidity shocks the main risk point in Q3. Over the past two years, the rise in US Treasury yields and the surge in bond issuance have been important triggering factors, such as in 2023Q3 and 2024Q1.

Q4: How significant is the impact of maturing US Treasuries being rolled over? After US Treasuries mature, they are mainly rolled over through short-term debt issuance (with short-term debt accounting for about 85%). The characteristics of the "rolling" peak of US Treasuries suggest that the impact from the scale of maturing rollovers may not be significant.

Q5: How significant is the impact of TGA replenishment? Looking back at the TGA replenishment in 2023, the short-term impact was significant, with the market rising rapidly after the peak of bond issuance and interest rates. Currently, the marginal increase in issuance from TGA replenishment is smaller than in 2023, and the liquidity absorption capacity of the money market is also smaller than in 2023, but the pressure from the Federal Reserve's balance sheet reduction is also less than in 2023. Overall, this year's TGA replenishment will still have liquidity shocks, but to a lesser extent than in 2023Q3. However, if US Treasury yields experience significant upward pressure in Q3, the Federal Reserve theoretically has considerable policy hedging space.

Q6: Will the market necessarily fall if US Treasury yields rise? When US Treasury yields rise, the market is mostly up; during liquidity shocks, the market may undergo phase adjustments; however, liquidity disturbances will not reverse market trends, and once liquidity issues are resolved, the market will return to its original trend.

Report Body

I. Will the "Q3 Curse" Hit the US Stock Market?

(1) Question 1: What are the seasonal effects of Q3 in the US stock market?

Historical data shows that the probability of a Q3 adjustment in the US stock market is not low, especially in August and September. Some underlying factors include liquidity tightening at the end of the fiscal year (corporate fiscal year-end settlements, accelerated government funding, etc.), political event windows (elections, etc.), a higher proportion of government bond issuance in Q3, and policy uncertainties related to the new fiscal year's scale.

From 1928 to present, the average gains for the S&P 500 index in August and September are 0.67% and -1.17%, respectively; from 1973 to present, the average gains are -0.08% and -1.00%; from 1990 to present, the average gains are -0.56% and -0.84%; from 2000 to present, the average gains are 0.09% and -1.51%; from 2018 to present, the average gains are 1.06% and -2.67%.

From an industry perspective, the Q3 seasonal effects are quite significant in sectors such as basic materials, industrials, consumer discretionary, financials, technology, and healthcare;

In contrast, the Q3 seasonal effects in telecommunications, utilities, and consumer staples are relatively weak, reflecting a certain degree of risk aversion.

(2) Question 2: What expectations are currently being traded in dollar assets?

US Treasuries: Weak but persistent rate cut expectations.

The economy is weak but persistent, rate cut expectations are warming up, and dovish comments from Federal Reserve officials like Bowman and Waller have led to a continuous decline in US Treasury yields since mid to late May. Year-to-date, US Treasury yields have fluctuated between 3.6% and 5.0%, with a central tendency of 4.2%; since late May, rate cut expectations have been revised upward, bringing Treasury yields back to the central tendency, positioning them optimistically for the year.

US Stocks: Anticipating rate cuts and even recovery expectations.

This year, the performance of US stocks can be divided into four phases: (1) January to mid-February, trading on fundamental resilience, with a strong and volatile stock market and persistently low rate cut expectations; (2) mid-February to early April, trading on recession and tariff impacts, with US stocks continuing to decline and rate cut expectations rising; (3) April 2 to mid-June, trading on stabilizing fundamentals, with US stocks oscillating and recovering, and rate cut expectations decreasing; (4) since mid-June, with marginal weakening of economic data and upward revisions of rate cut expectations, US stocks and rate cut expectations have risen together. Recent concerns over tariffs have again led to a marginal decline in rate cut expectations

(3) Question 3: What are the main risk points in Q3 this year?

The implementation of the U.S. tax reduction bill, which raises the debt ceiling by $5 trillion, higher than the previous House version of $4 trillion. After the debt ceiling is raised, the Treasury's replenishment of the TGA account leads to a wave of short-term debt issuance, combined with a relatively large scale of U.S. Treasury maturities in Q3.

Liquidity shocks remain the main risk point in Q3 this year. Over the past two years, the rise in U.S. Treasury yields and the surge in bond issuance have been significant triggering factors, such as in Q3 2023 and Q1 2024.

(4) Question 4: How significant is the impact of U.S. Treasury rollovers upon maturity?

How significant is the pressure from the peak of U.S. Treasury maturities? The impact from the rollover of U.S. Treasuries upon maturity should not be large.

After U.S. Treasuries mature, they are mainly rolled over through short-term debt (with short-term debt issuance accounting for about 85%). Since short-term debt is issued at a discount and repaid at face value, the main participants are short-term debt investors such as money market funds, which currently have a relatively small impact on the liquidity of the equity market.

Additionally, the scale of U.S. Treasury maturities in July-August is around $2 trillion, which is roughly equivalent to the current monthly issuance scale of U.S. Treasuries. The "rolling" peak characteristic of U.S. Treasuries indicates that the impact solely from the scale of rollovers upon maturity may not be significant.

(5) Question 5: How significant is the impact of TGA replenishment?

First, reviewing the market's reaction to TGA replenishment in 2023: the short-term impact was significant, but it quickly recovered after the peak of bond issuance.

After the U.S. debt ceiling issue was resolved in June 2023, TGA replenishment took 4 months, with the balance rising from $50 billion in June 2023 to around $850 billion in October 2023. The monthly issuance of U.S. Treasuries increased from $1.5 trillion in the first half of the year to around $2.0 trillion in Q3, with the peak of bond issuance in October, mainly driven by short-term debt, while the issuance scale of medium- and long-term debt remained stable.

Simple calculation, the monthly bond issuance increment ratio brought by TGA replenishment = (8000/4)/15000 = 13%. During this period, the 10-year U.S. Treasury yield rose rapidly, from 3.7% in June to 5.0% in October, and after the TGA replenishment ended, the yield fell back to 3.8%. The main decline in U.S. stocks occurred from August to October, with the S&P 500 experiencing a maximum drop of 10.3%. After the peak of bond issuance and the yield reached its top, the market quickly rebounded.

How significant is the current impact of TGA replenishment? The marginal bond issuance increment is smaller than in 2023, the liquidity absorption space in the money market is less than in 2023, but the Federal Reserve's balance sheet reduction pressure is also smaller than in 2023.

Analysis from three perspectives:

First, the incremental scale: The current TGA balance is over $300 billion. If it is replenished to the $800 billion level at the beginning of the year, the increment would be around $500 billion. Considering the current monthly issuance scale of U.S. Treasuries is about $2.5 trillion, assuming this TGA replenishment takes 3-4 months, the monthly bond issuance increment ratio brought by TGA replenishment = (5000/3)/25000 ~ (5000/4)/25000 = 5.0% ~ 6.7%, with marginal impact smaller than the 13% in 2023;

Second, ON-RRP scale: Considering that the current overnight reverse repurchase (funds borrowed by the Federal Reserve from financial institutions) is only $600 billion, far below the over $2 trillion in 2023, the liquidity abundance in the money market (the space for short-term debt liquidity absorption) is not as good as in 2023;

Third, the Federal Reserve's balance sheet reduction progress: The scale of balance sheet reduction is about two-thirds smaller than in 2023.

Overall, this year's TGA replenishment will still have liquidity impacts, but the extent will be better than in Q3 2023.

What is the attitude of the Federal Reserve and the Treasury? They are likely both inclined to support the market.

Theoretically, the Federal Reserve will adjust and hedge during the Treasury's expansion and contraction to ensure relative stability in market liquidity. In July 2023, the Federal Reserve raised interest rates for the last time, paused in September, but balance sheet reduction continued. Currently, the Federal Reserve's total liabilities have fallen back to early 2020 levels, and the pace of balance sheet reduction has slowed from the initial $60 billion in Treasuries + $35 billion in MBS to $5 billion + $35 billion. If there is significant upward pressure on U.S. Treasury yields in the third quarter, the Federal Reserve theoretically has considerable policy hedging space. From the Ministry of Finance, Beisente recently stated that it is unreasonable to expand the issuance scale of long-term government bonds, believing that the yield curve will shift downward overall.**

(6) Question 6: If U.S. Treasury yields rise, will the market necessarily fall?

When U.S. Treasury yields rise, the market is mostly up; during liquidity shocks, the market experiences periodic adjustments; however, liquidity disturbances will not reverse the market trend, and once liquidity issues are resolved, the market will return to its original trend.

Since the beginning of 2023, there have been five adjustments in the upward trend of the U.S. stock market. The main reasons for the first three adjustments were liquidity shocks, which were more of a correction due to the market's overly optimistic view on monetary policy, or periodic liquidity shocks caused by risk events such as the Silicon Valley Bank incident in March 2023, fiscal bond issuance in the third quarter of 2023, and the yen carry trade in August 2024, rather than fundamental issues. As liquidity issues eased, market sentiment stabilized, and funds flowed back into the market. However, in the 4th adjustment (July-September 2024) and the 5th adjustment (February-April 2025), fundamental issues began to become a concern, including trade environment and geopolitical factors, with the market oscillating between recession expectations and interest rate cut expectations.

The liquidity shock in Q3 2023 is of reference value for the current situation, but it cannot be completely equated.

(1) Similarities:

After the debt ceiling was suspended in June 2023, the Treasury's bond issuance surged;

After the passage of the U.S. Tax Cuts and Jobs Act in 2025, the Treasury is also expected to rebuild the TGA account.

(2) Differences:

The factors for the decline in Q3 2023 came from:

Monetary factors: Tightening liquidity. On July 27, the fourth interest rate hike of the year by 25 basis points, and in September, the Federal Reserve paused interest rate hikes as expected but with hawkish guidance;

Multiple factors driving U.S. Treasury yields up to 5%. Unexpected economic data, fiscal bond issuance to replenish the TGA account, continued balance sheet reduction by the Fed, and geopolitical conflicts pushing up energy prices;

Micro factors: Technology sector performance fell short of expectations. Quarterly earnings reports from META, Tesla, Microsoft, Amazon, etc., all showed weakness.

Current differences:

Monetary factors: The Federal Reserve has entered a rate-cutting cycle, and balance sheet reduction has significantly slowed;

Policy factors: Tax cuts have been implemented, providing support for fundamentals; expansion of traditional energy and easing geopolitical tensions have suppressed energy prices;

Micro factors: Focus on the earnings performance of technology stocks during the earnings season, which is expected to provide strong positive support for the market.

Summary: Fundamentals are the rope, and liquidity is the catalyst. Looking ahead to Q3 for U.S. stocks, considering the marginal increase in bond issuance, existing liquidity (reverse repos), and pressure from the Fed's balance sheet reduction, it is expected that liquidity will likely still have an impact, but to a lesser extent than in Q3 2023 In addition, liquidity issues may cause short-term shocks, but they will not reverse the market trend; macro policies and micro performance factors are the long-term ropes.

Note: This article has been edited.

Authors of this article: Liu Chenming, Li Rujuan, Chen Zhenwei, Source: Chenming's Strategic Deep Thinking, Original Title: "【GF Strategy Hong Kong Stocks & Overseas】Will the US Stock 'Q3 Curse' Come?"

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