September is typically not a good month for stocks, but many did not expect it to be this brutal. After returning from the Labor Day holiday, U.S. stocks plummeted across the board on Tuesday, with S&P 500 falling by 2% and the Nasdaq dropping by over 3%. The semiconductor sector was hit particularly hard, with the VanEck Semiconductor ETF falling by 7.5%, marking the largest decline since March 2020. Nvidia dropped nearly 10%, losing nearly $280 billion in market value, setting a record for the largest single-day loss in U.S. stock history. What exactly happened?

Most mainstream media attribute the declines to the unexpectedly weak manufacturing data released on Tuesday, which sparked recession fears again. The U.S. August ISM Manufacturing Index came in at 47.2%, below the expected 47.5%, marking the fifth consecutive month below the critical 50 mark. The Production Index fell for the fifth month in a row, hitting its lowest level since May 2020. The New Orders Index dropped to 44.6%, a 15-month low.

However, while these figures look alarming, they shouldn't be the main cause of the market's turbulence; it seems more like an excuse. For the ISM Manufacturing PMI, as long as it's above 42.5, it generally indicates an expansion of the overall economy over a period of time. Last week's revised Q2 GDP and July core PCE figures were both better than expected, pointing to a soft landing for the economy. Even if the PMI data was unexpectedly weak, it would only add urgency to the Fed's need for cutting rates.

The real issues lie in investor sentiment and the aftermath of Nvidia's disappointing earnings. Historically, September has been the worst-performing month for U.S. stocks. In the past five years, the S&P 500 has recorded monthly declines 100% of the time, with an average drop of 4.2%. Some point out that during the summer, more traders are on vacation, causing market activity to lag. This leads to stronger market performance with lower volumes. As vacations end and more traders return to the market, volatility increases. Even with Tuesday 's sharp decline, the S&P 500 is still up over 15% for the year, giving the bulls plenty of reasons to take profits and wait.

More than that, leading the AI frenzy, Nvidia's earnings last week fell short of expectations, making the semiconductor sector a disaster zone. Although Nvidia's Q2 revenue reached $30 billion, a 122% year-over-year increase, it was significantly slower than the over 200% year-over-year growth in the previous three quarters. The company also expects Q3 revenue to be around $32.5 billion, a 79% year-over-year increase, dropping back to double digits. The market's highest expectation was $37.9 billion. For Nvidia, which has consistently delivered explosive surprises to investors, this earnings report was clearly not enough, sparking concerns that the semiconductor sector might have peaked. Last week, economic data and bargain hunters provided some support, but as the market cools down entering September, there are worries about whether the AI frenzy is fading.

Besides Nvidia, AMD and Micron Technology both fell nearly 8% on Tuesday, while Broadcom, TSMC, Arm, and Qualcomm all dropped over 6%. Even with this significant pullback, Nvidia is still up nearly 120% this year, TSMC is up over 55%, and Broadcom is up nearly 38%. Such strong stock performance also makes them more prone to high volatility. Notably, Broadcom will release its earnings report after the market closes on Thursday; whether AI can support its valuation will now be crucial.

In addition to these factors, concerns about Friday's non-farm payroll data may also be weighing on sentiment. Remember that in July, non-farm payrolls significantly missed expectations, and the unemployment rate unexpectedly rose to 4.3%, a nearly three-year high, triggering a broad decline in risk assets. The probability of the Fed cutting interest rates by 50 basis points surged, raising fears of an economic downturn. Although subsequent economic data exceeded expectations and weekly jobless claims stabilized, giving U.S. stocks upward momentum, the market still fears that the upcoming non-farm payroll report might repeat the poor performance, triggering another market shake-up.

Overall, Tuesday's sharp decline in U.S. stocks seems more like an emotional outlet. Q2 earnings were generally strong, AI remains a macro trend, and continuously updated economic data points to a possible soft landing. Many investors are likely to see the market pullback as a buying opportunity, especially with the Fed about to start a new cycle of interest rate cuts. However, one should still be cautious.