September will be the S&P 500's worst month yet: the AI sector remains weak, and analysts are turning cautious.

The S&P 500 remains near record highs, with strong earnings and Wall Street strategists raising their year-end price targets keeping market sentiment optimistic. However, as September approaches, technical analysts are turning cautious: the AI sector remains weak, market sentiment is overheated, and fund rotation has failed to provide new upward momentum for the market.

Jason Hunter, head of technology strategy at JPMorgan Chase, pointed out that the S&P 500 is approaching a long-term channel resistance level near 7,900 points, while AI-related stocks continue to weaken. In particular, the Philadelphia Semiconductor Index, after breaking below key support in June, is still about 22% below its peak, indicating that the previous correction may not yet be over.

“From a technical analysis perspective, this is a warning sign, indicating that this round of adjustments is not yet truly over,” Hunter said.

Meanwhile, Ned Davis Research's sentiment indicator shows that investors have entered a "overly optimistic" zone. Coupled with seasonal weakness in September and uncertainty surrounding the upcoming midterm elections, short-term market risks are accumulating.

The AI sector remains weak, and the semiconductor index is still in a correction phase.

The overall market remains high, but the market itself is not strong. The Philadelphia Semiconductor Index, after breaking through key support in June, has seen limited rebound and is currently still about 22% below its historical peak. Hunter believes this means that the correction in core AI beneficiary sectors, represented by chip stocks, may not yet be over.

However, he does not recommend investors aggressively reduce their positions, but instead emphasizes trend-following trading and setting stop-loss orders. He stated that experience over the past year and a half to two years shows that trying to anticipate a decline is not a profitable strategy. The S&P 500 itself has also entered a sideways trend, essentially "standing still" for the past two months.

Jonathan Krinsky, Chief Market Technical Analyst at BTIG, pointed out that while there has been sector rotation recently, funds have been shifting between different sectors rather than forming a unified force to drive the market upward. "What we're seeing is just funds flowing from one sector to another, bouncing back and forth without any real progress," Krinsky said. If the funds flowing out of AI and technology stocks cannot return, the market may face a new round of downward pressure.

Sentiment is high, and the "September curse" is attracting attention again.

London Stockton, an analyst at Ned Davis Research, points out that both of the firm's indicators measuring group sentiment and trading sentiment are currently in "overly optimistic" territory. Historically, when both indicators reach this level simultaneously, the market tends to be more vulnerable to pressure.

In its August 26 report, Stockton stated that the market may need to experience a period of volatility to digest the excessive optimism, or wait for the midterm elections to settle down.

Seasonally, September is precisely the month when the S&P 500 is most vulnerable to pressure. Over the past 30 years, the S&P 500 has fallen by an average of 0.8% in September, making it the worst-performing month of the year, while it has risen by an average of 0.9% in the other 11 months.

Even equal-weighted indices cannot completely hedge against risks.

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

However, Krinsky believes that the equal-weighted index is also unlikely to completely avoid the risk of a pullback. BTIG data shows that since 1990, the SPW has experienced at least a 7% pullback every time it occurs between August and October in a midterm election year, with the only exception being 2006, but the index had already fallen by 9% between May and July.

Krinsky also cautioned that what could truly disrupt market equilibrium might not be the election itself, but rather unpredictable unforeseen events. For US stocks, which are currently at high levels, the seasonal pressures of September may only be superficial. More concerning is that the simultaneous occurrence of a weakening AI sector, insufficient market upward momentum, and overheated sentiment could amplify market volatility with any unexpected event.

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