Semiconductors have broad market headwinds to fight, but seasonality on their side
Subscribers to The Contrarian Edge received this commentary on Saturday, September 26.
As a generational procrastinator, ‘the horse always smells the barn’ has always been one of my favorite idioms. It’s rooted in fact; animals really do pick up their pace heading home, knowing food and rest are close. Anyone that’s ever crammed for a test or wrote up against a deadline knows that feeling.
On Wall Street, investors can already smell the barn for this year. The fourth quarter of 2026 is less than a week away, and in the blink of an eye investors will be inundated with election, earnings, and Fed rhetoric. These three factors have really muddied the water and made forecasting the final few months of the year difficult.
Seasonal data shows there are two exchange-traded funds (ETFs) that could ‘smell the barn’ and finish 2026 strong. What makes their quantitative data so interesting is they go against the grain of two broad market pressures. So, what will win out?
Schaeffer’s Senior Quantitative Analyst Rocky White identified the 25 best-performing ETFs in the last decade for October and the fourth quarter. Beyond bank sector outperformance covered last week, two ETFs to show up on both lists were the VanEck Semiconductor Trust (SMH) and Invesco Aerospace & Defense ETF (PPA).
Can Semis Stick the Landing?
SMH averages an October return of 1.7% to go with a 60%-win rate in the last 10 years, good for ninth on the list. For the fourth quarter, SMH averages a 9.4% return in the last decade and was higher eight times out of 10.
The semiconductor ETF spent last week eyeing $600, but has since climbed above this mark, moving above a downtrend channel from its mid-June peak at $671.83. The 126-day (six-month) moving average stepped up earlier in September and has been breached on a closing basis only once in 2026.
It seems insane to cite semiconductor seasonality as the 10-year Treasury yield topples 5% for the first time since 2007. However, note in the chart below that the last three times bond yields crossed 4.8% were October 2023, January 2025, and July 2026. SMH’s next-month return after those peaks sits at 15.5%, -4.5%, and 3%. Not great, but nothing scary.
This is by no means a predictor of future success, but it was comforting to know that tech can be resilient in the face of elevated borrowing costs, when the prevailing notion is that higher bond yields spell doom for high growth beta names.
Defense Stocks Ready to Go on Offense
Defense ETF PPA may not get the headlines of the larger iShares U.S. Aerospace & Defense ETF (ITA), but it’s the second-largest ETF in the aerospace and defense sector. PPA averages a monthly gain of 2.6% in October with a 63%-win rate. For the fourth quarter, PPA averages a 10% return and 89%-win rate.
After breaching the 320-day moving average to start September, PPA has spent the subsequent weeks trading in a tight range around $160. Moves of similar magnitude for October would put that trendline in play again. Keep an eye on the year-to-date breakeven level, as well as PPA’s 14-Day Relative Strength Index (RSI) of 30, on the cusp of “oversold” territory.
At the risk of oversimplication, the most important factor for the aerospace and defense industry going forward is the geopolitical conflicts in Iran and Ukraine. Their endlessness has kept the backlogs of RTX (RTX), Lockheed Martin (LMT), and their like brimming. But election season is coming up, and these wars are not popular with the electorate.
The Republican-led Senate voted shot down a House-led bill end the war in Iran and came within one vote (49-50). There are reports that a trilateral meeting with Russia, Ukraine, and the UAE – with the U.S. as a proxy – are in the works.
Should these conflicts some to a ceasefire or swift resolution in the next few months in the name of political hegemony, it could take some momentum out of the defense sector. But if there’s a blue wave coming as polls appear to suggest, we could be in for political gridlock that draws out both conflicts. Plus, upbeat third-quarter earnings reports – that extol the virtues of those backlogs built up this year — in the next month or so could offset this headwind.
A confluence of quantitative data a foolproof signal does not make, as Bond yields and geopolitical volatility could render these studies obsolete in a hurry. But remember, earnings are a lagging indicator, so there’s a world where semiconductors and defense stocks brush off macro headwinds thanks to solid fundamentals within upcoming quarterly reports. If that’s the case, momentum – always a funny thing – could make for a photo finish in 2026.
The Metal (s) Will Live On
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