Tech Stocks Face a Tough Seasonal Period

September has historically been the worst month of the year for technology stocks.  Over the last decade, the Nasdaq 100 Index ($IUXX) (QQQ) has fallen an average of -0.6% during September, the only month of the year with a negative average.  The Nasdaq 100 fell -5.7% in the September of 2020 and 2021.

It remains to be seen if September lives up to its reputation, but current market sentiment suggests technology stocks may remain weak.  Another reason investors may remain cautious this September is the threats of soaring inflation and aggressive Fed tightening.  The Nasdaq 100 Index is down -4.7% in August and has dropped more than -6% over the past three sessions, its biggest three-day decline since mid-June.

Carson Group Holdings said, “between the Fed, inflation, and the conflicting signals were getting about the economy, we’re entering the month of September in a precarious position.” The weakness in technology stocks in September reflects a broad seasonal trend as the month overall has been a bad one for equities.  In addition, many analysts cite mutual funds that begin selling losing positions before year-end, which is in September or October for some funds.

Elevated valuations are also a concern for some of the mega-cap technology stocks.  Apple (AAPL) trades at 24.7 times estimated earnings, above its 10-year average of 16.7.  Also, Microsoft (MSFT) is trading at 25.1 times its estimated earnings, well above its long-term average of 21.5.  The Nasdaq 100’s price-earnings ratio is about 5% above its average over the past decade.

Investors seem to be bracing for more pain in technology stocks.  The number of outstanding bearish options contracts on an exchange-traded fund (QQQ) that tracks the Nasdaq 100 spiked on August 19 to the highest level since the aftermath of the dot.com bust and is holding just below that level.  However, Carson Group Holdings said, “tech earnings have overall been quite solid, and the fourth quarter of a midterm year is historically very strong, so we could see some positive seasonal headwinds toward the end of the year.”

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