September is once again a tough month for stocks

The S&P 500 fell 4.2% last week on concerns about the health of the U.S. economy. Friday’s monthly jobs report showed the labor market added fewer jobs than expected. Tuesday’s weak manufacturing data led stocks to their worst day since early August.

Going back to 1928, the S&P 500 has declined an average 1.2% in September, the weakest month of the year for stocks. The index ended lower 56% of the time over that stretch, according to Dow Jones Market Data.

In the coming days, investors will parse Wednesday’s inflation report to see whether price pressures are continuing to ease and look to see whether big tech stocks, such as Nvidia, can find their footing after a recent slide. For now, many analysts and portfolio managers are grappling with the less-optimistic tone that has taken hold following a roaring rally in the first half of 2024.

“We were already tensed up [ahead of the jobs report], and now it seems like economic data is not moving in the right direction," said Callie Cox, chief market strategist at Ritholtz Wealth Management.

The Federal Reserve is widely expected to cut interest rates at the conclusion of its Sept. 18 meeting. The only question is whether it takes its typical approach of trimming rates by a quarter-percentage point or opts to be more aggressive with a half-point cut.

Market watchers such as Cox who were hoping for a glimmer of clarity didn’t find it in Friday’s jobs report. (While fewer-than-expected jobs were created in August, growth was stronger than the previous month and the unemployment rate edged down.)

Some investors are calling for a bigger rate cut to revive the labor market; others fear such a move would send the wrong message to financial markets and spark a deeper downturn.

In addition to the uncertainty over the Fed’s plans, markets are expected to remain volatile heading into the November election. October is typically the weakest month for stocks during election years, with the S&P 500 down 1.4% on an average going back to 1980.

The S&P 500 is still up 13% this year—but sentiment began to shift a month ago when July’s weaker-than-expected jobs report raised questions about whether the economy had begun to falter and the Fed had waited too long to cut interest rates. Then the unwinding of some of Wall Street’s most popular trades intensified Aug. 5, sending the S&P 500 to its worst day in almost two years.

The tumble has reordered the market’s winners and losers. Some of the shine has come off Nvidia and other stocks riding the frenzy over artificial intelligence. Nvidia’s stock fell 14% last week, erasing $405.7 billion in market value, the largest for any company on record. Investors, meanwhile, have rotated into defensive stocks. Of the S&P 500’s 11 sectors, only consumer staples and utilities are up this month.

If the S&P 500 ultimately finishes the month in the red, it would be its fifth consecutive September with a decline.

To what degree the trend, dubbed the “September effect," moves markets is unclear. One popular theory suggests that traders returning from vacation are selling their winners and harvesting tax losses, which can amplify market moves, said Jay Woods, chief global strategist at Freedom Capital Markets.

“September kicked us in the teeth on day one," Woods said. “Now, we’ll have to see if we can recover."

Despite the market’s recent slide, it still looks expensive by some measures. Companies in the S&P 500 are trading at 21 times their projected earnings over the next 12 months, above their 10-year average multiple of 18, according to FactSet.

Treasury yields fell after the jobs report, with the benchmark 10-year Treasury yield closing at 3.710%, its lowest level of the year. Bond yields fall as prices rise, and investors tend to flock to the safety of U.S. Treasurys during periods of market upheaval.

“The question is how much does the Fed need to react to the idea of a slowing labor market as opposed to a shrinking labor market," said Steve Sosnick, chief strategist at Interactive Brokers.

Write to Hardika Singh at hardika.singh@wsj.com