S&P 500 (SPX), July's Sector Rotation Storm is Coming...Momentum Stocks Slam the Brakes After 44% Surge

▲ U.S. Stock Market / AI Generated Image

A sharp reversal warning has been issued for momentum trades that pushed the U.S. stock market to all-time highs. The Invesco S&P 500 Momentum ETF (SPMO) surged 44% in the second quarter but plummeted 6.6% in the first two trading days of July.

According to economic media outlet MarketWatch on July 5 (local time), SPMO's Q2 gain was its highest since its launch in 2015. The momentum stock rally led to the largest quarterly gains for the S&P 500 Index (SPX) and Nasdaq Composite (COMP) in six years. However, with the start of a semiconductor stock sell-off, the Invesco PHLX Semiconductor ETF (SOXQ) has fallen 11.4% in July.

Warren Pies, co-founder and strategist at 3Fourteen Research, said, “This July will be particularly volatile for momentum trades.” According to his analysis, momentum stocks have declined in July for the past five consecutive years. The average July return over the last five years is approximately -5%. Pies warned that a “violent rotation” of funds out of momentum stocks could occur in the coming weeks.

A popular strategy in the first half of this year was buying semiconductor stocks and selling hyperscalers like Microsoft (MSFT) and Meta Platforms (META). Recently, the trend has started to reverse. Micron Technology (MU) has plunged 15.5% in July. However, its year-to-date gain is still approximately 242%.

The concentration of AI investments was also identified as a risk factor. Vanguard expects AI-related companies to account for more than half of the S&P 500's earnings growth this year and next. Qian Wang, Head of Global Capital Markets Research at Vanguard, explained that expectations are concentrated on 30-40 AI stocks within the S&P 500. He emphasized, “We need to prepare for a very rough ride.”

However, experts did not conclude that the sector rotation was a sign of a bull market collapse. Michael Arone, Chief Investment Strategist at State Street Investment Management, said, “The fundamentals of the bull market remain strong,” and “investors are changing their investment destinations instead of leaving the stock market.” Pies also analyzed that low correlation between stocks and strong sector rotation could lay the groundwork for new market highs later this summer.

[Key Article Summary]

-SPMO surged 44% in Q2 but plunged 6.6% in the first two trading days of July.

-Momentum stocks have declined in July for the past five consecutive years, with an average July return of approximately -5%.

-Experts warned of the risk of AI stock concentration but did not conclude that strong sector rotation was a sign of a bull market collapse.

*Disclaimer: This article is for investment reference only, and we are not responsible for investment losses based on it. The content should be interpreted for informational purposes only.*