September blues for the tech trade

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September got off to a shaky start for tech investors, with a 3.3% decline in the Nasdaq 100 over the first two trading days of the month. The top AI chipmaker, NVIDIA, has been a driver of the sell-off, falling 11% during the same period, resulting in a USD 327bn decline in market capitalization. And the FANG+ index, which tracks the performance of the top 10 most-traded US tech stocks, has fallen 3.2%.

A modest miss on the US ISM manufacturing business survey appeared to be the immediate cause of the move, alongside reports of more stringent US-led controls on AI and chipmaking gear exports to China. Retaliation risk may also be growing, with the state-linked Global Times warning Dutch equipment maker ASML could “permanently” lose market access in China. NVIDIA yesterday denied a Bloomberg report that the US Department of Justice had subpoenaed NVIDIA and other companies as part of an antitrust investigation into the chipmaker’s dominance of AI. According to media reports, NVIDIA said “we have inquired with the US Department of Justice and have not been subpoenaed.”

Seasonality may also be adding to weak sentiment. The S&P 500 has declined in September in each of the past four years and in seven of the past 10. Over the past 15 years, the Nasdaq’s average September monthly return has been -1.4%, against an overall average monthly return close to +1.4%. Our analysis shows global tech’s risk-adjusted returns also tend to decline in both the second and third quarter.

While we believe more short-term tech volatility may be ahead, it could also be an opportune moment for investors to draw up and execute on tech “shopping” and “disposal” lists. Below, we detail our views within key tech sectors:

Semiconductor capital spending still looks promising, with some parts of the industry more attractive than others. NVIDIA's recent earnings beat the consensus but missed against the high end of expectations, offering a mixed signal. For the broader semi sector, we expect support in coming quarters from strong order books and an anticipated rise in megacap AI capex intensity (capex divided by sales), which remains below historical peaks.

Within semis, we would tilt exposure to AI logic chips first, where valuations have become less demanding, followed by quality foundry stocks, where earnings growth should remain strong. Memory chip stocks are a high-beta trade, which works better in more bullish markets than in current conditions, and they appear more exposed to US regulatory risks, in our view. We see chip manufacturing equipment makers as the most vulnerable in the near term, given higher revenue exposure to China in the first half of this year and an anticipated increase in export restrictions.

Quality large-cap tech companies are showing evidence of AI returns. Despite softer sentiment for large caps, second-quarter results were solid and global tech appears on track to deliver earnings growth near 15-20% over the next six quarters. AI monetization by big tech companies also appears to be picking up. Microsoft said it expects an acceleration in its cloud business revenue growth in the first half of next year, while Meta said the company is mapping its investments against “significant monetization opportunities.” Megacap tech valuations have come down, currently trading near 27 times next year price to earnings—around 15% below their recent peak. With near-term core fundamentals still intact and strong free cash flow generation, we maintain our bias toward quality tech companies with good secular growth and resilient earnings.

Smartphone supply chains should benefit from the replacement cycle. Apple shares have shown more relative resilience in recent week ahead of the seasonal iPhone launch period, which is expected to reveal more on AI services and monetization. Supply chain checks suggest an initial launch unit preparation in line with last year, though foundry checks indicate room for 5-10% higher orders if initial demand is strong. Without taking any single-name views, we believe replacement cycles could provide upside risks to smartphone shipments near term against low market expectations. Within the smartphone supply chain, we like companies with better pricing power and industry leadership positions, and we are more cautious on low-quality hardware companies with margin pressure risks.

So, while near-term tech volatility may persist, we believe the broader AI narrative and investment case remain intact. For investors, we believe the next steps will depend on the relative technology and AI exposure within individual portfolios. Those with low AI holdings could consider building exposure through structured strategies to navigate potential volatility ahead. For those with higher allocations, capital preservation strategies could serve as a hedge.