The stock market is facing several issues: a tech re-rating, a slower economy, a seasonally weak period and an uncertain presidential outcome. Big-cap tech is getting re-rated This is what happens when the market gets top-heavy in technology. Like the pros say, when you get a correction in a concentrated market, you take the stairs up and the elevator down. Prices for megacap tech stocks have run up dramatically in hopes of outsized earnings. The problem — as was demonstrated by the reaction to Alphabet’s earnings yesterday — is that investors are coming to understand there is still not a big payoff for the artificial intelligence infrastructure play, that the return on investment, or ROI, on AI is not going to materialize for a long time. Tech overlords do not seem very worried about this. Alphabet CEO Sundar Pichai said he’d rather overspend on capex than misread demand and underspend. Investors may not share the same sentiment. Regardless, investors have been re-rating tech stocks for many weeks now. I noted several weeks ago that investors were concerned that, while earnings for the biggest tech stocks were continuing to rise, they were not going up as fast as they had been. Decelerating earnings growth is a classic warning sign. This did not happen overnight. Technology stocks have been toppy for some time. Many of the major tech indexes and exchange-traded funds are down double digits from recent highs. Technology sector ETFs (% off 52-week highs) Ark Innovation (ARKK): 18% Global X Cloud Computing ETF (CLOU):17% VanEck Semiconductor (SMH): 15% S & P Technology Sector (XLK): 9% Vanguard Mega Cap Growth (MGK): 8% Global X Social Media (SOCL): 9% Invesco QQQ Trust (QQQ): 8% Semiconductors, which were the market leaders in the first quarter, have been particularly weak. Semiconductors (% from 52-week high, and when they hit highs) AMD : 36% (March) Micron : 30% (June) Qualcomm : 21% (June) Nvidia : 19% (June) Broadcom : 18% (June) Weak economy also an issue Second, there are concerns about a slowing economy and that the Fed may stay high too long. Former New York Federal Reserve Bank President Bill Dudley’s editorial Wednesday was the catalyst for this worrywart crowd. Dudley suddenly announced that, “The facts have changed, so I’ve changed my mind” about the economy and called for the Fed to cut rates next week because the three-month average unemployment rate was rising. Don’t forget seasonality Seasonality is also a factor, as volatility tends to increase mid-July to October. Goldman Sachs noted that the historic inflection date, the date when the S & P 500 starts seeing more down days, is July 17, with a peak in September, but not really flipping until the end of October. “No more neon green days in the upcoming summer future,” Goldman said in the report. Watch ETF flows — they have been exceptionally strong One of the things that has really helped the markets this year is consistently strong inflows into equity ETFs, particularly plain-vanilla index ETFs such as the S & P 500. Matt Bartolini, head of SPDR Americas Research at State Street, noted $500 billion in inflows into ETFs so far this year, on pace for a record year. ETFs already have about $10 trillion in assets under management. Watch the flows here for signs of weakness. It is very typical for flows to dry up in August as everyone is away for vacation. Does the election matter? Historically, most presidents do not have a big effect on the stock market. However, this election may be different. Curiously, “S & P500 has been super correlated to Trump Win odds lately,” Goldman wrote in the same report, noting that the recent change in election probabilities — with Kamala Harris now the likely Democratic nominee — may be causing some “recalibration” in portfolios. CFRA chief investment strategist Sam Stovall seems to agree. “The ‘certainty’ of the Trump trade appears to be fading,” he wrote in a note to clients. “In the near term, investors may end up being frozen by indecision until clarity improves on a multitude of issues, such as industry regulation, medical insurance, corporate and individual tax policy, and defense spending, just to name a few.” It is an interesting observation, and just one more ingredient in this very tricky summer stew.