Software stocks crushed chips in August. History says September gets tougher: Chart of the Day

In August, software stocks surged ahead of chip stocks, with the iShares Expanded Tech-Software Sector ETF posting a 16% gain and the S&P 500 gaining over 2.5%. However, semiconductor stocks only managed a 1% increase, and the S&P 500 only gained 2.5%. For a brief period, chip stocks kept pace with software, but by the final two weeks of the month, semiconductor stocks lost most of their rally, while software continued to climb.

Companies supplying the physical components of the AI boom, including electrical equipment, power infrastructure, networking gear, and construction, had all seen gains in mid-August. However, these gains were short-lived as they rolled over together, while software stocks continued to rise. This has resulted in a record divergence between software and chip stocks in August.

Notable software stocks that had strong August performances include Atlassian, Palantir, Salesforce, ServiceNow, and CrowdStrike, with gains ranging from nearly doubling to more than 50%. On the other hand, chip stocks took a turn for the worse in the second half of the month, with 58 out of 61 semiconductor stocks in a Yahoo Finance basket falling, wiping out approximately $1.1 trillion in market value.

September presents a different starting point for software stocks, as they enter with momentum, while much of the physical AI trade is on the defensive. Historically, software stocks have held up well through September, with a median gain of around 1% by September 15. However, semiconductor stocks have typically been down by roughly 1% by then, and slid about 3.5% from September 15 to month-end.

Given that September has been historically weak for the S&P 500 and volatility tends to increase as summer ends, the market's ability to rotate around weak chip stocks in September remains to be seen.