In September, the S&P 500 Faces Its "Worst Month": AI Sector Remains Weak and Analysts Turn Cautious

The S&P 500 Index remains near its historical highs, with strong earnings performance and successive upward revisions to year-end target prices by Wall Street strategists keeping market sentiment optimistic. However, as September approaches, technical analysts are turning more cautious: the AI sector continues to show weakness, market sentiment is running hot, and sector rotation has yet to inject new upward momentum into the broader market.

Jason Hunter, Head of Technical Strategy at JPMorgan, pointed out that the S&P 500 Index is approaching the long-term channel resistance near 7900 points, while AI-related stocks continue to weaken. In particular, after the Philadelphia Semiconductor Index broke key support in June, it remains about 22% below its peak, suggesting the previous correction may not be over.

“From a technical analysis standpoint, this is a warning signal, indicating that this correction wave may not be truly over,” said Hunter.

Meanwhile, sentiment indicators from Ned Davis Research show that investors have entered the “excessive optimism” zone. Combined with the seasonal weakness of September and the uncertainty brought by the approaching midterm elections, short-term market risks are accumulating.

AI sector remains weak, semiconductor index still in correction range

The broader market holds at high levels, but its internal strength is lacking. After the Philadelphia Semiconductor Index broke key support in June, its rebound has been limited, still about 22% below its historical peak. Hunter believes this suggests the AI core beneficiary sector, represented by chip stocks, may not have finished correcting.

However, he does not recommend that investors aggressively reduce their positions, but instead emphasizes following the trend and setting stop-losses. He notes that experience from the past year and a half to two years indicates that trying to predict declines in advance is not a profitable strategy. The S&P 500 itself has also been rangebound, essentially “moving sideways” over the past two months.

Jonathan Krinsky, Chief Market Technician at BTIG, pointed out that although there has recently been sector rotation, funds are mostly moving back and forth between sectors, not forming a collective force to drive the market higher. “What we’re seeing is just money shifting from one sector to another, oscillating with no real progress,” Krinsky said. If funds flowing out of AI and tech stocks do not return, the market could face a new round of downward pressure.

Hot sentiment, the September “curse” returns to the spotlight

London Stockton, an analyst at Ned Davis Research, pointed out that the institution’s two indicators measuring crowd sentiment and trading sentiment are both in the “excessive optimism” zone. Historically, when both indicators reached this level simultaneously, the market often became more vulnerable to pressure.

In an August 26 report, Stockton stated that the market may need a period of volatility to digest the over-optimistic sentiment, or wait for the uncertainty surrounding the midterm elections to subside.

From a seasonal perspective, September happens to be the month that puts the most pressure on the S&P 500. In the past 30 years, the S&P 500 averaged a 0.8% decline in September, making it the worst-performing month of the year, while the other 11 months averaged a 0.9% gain.

Equal-weight index also hard to fully avoid risks

Some investors view the S&P 500 Equal-Weight Index (SPW) as a relatively safe choice. This index reduces the influence of mega-cap companies, is currently only about 1% away from its all-time high, and previously benefited from rotation of capital from overvalued AI stocks to other sectors.

But Krinsky believes that the equal-weight index is also difficult to fully escape the risk of a pullback. According to BTIG data, since 1990, during the August to October period of midterm election years, SPW has experienced at least a 7% pullback every time—with the exception of 2006, but at that time the index had already declined 9% from May to July.

Krinsky also reminded that what can truly upset the market’s balance may not be the election itself, but rather unpredictable sudden events. For U.S. stocks at elevated levels, the seasonal pressure in September may be just a surface phenomenon. More concerning is that if the AI sector weakens, market upside momentum is lacking, and sentiment runs hot all at once, any unexpected event could amplify market volatility.