The S & P 500’s July performance looks far more impressive when accounting for the dismal performance in momentum stocks. The benchmark index closed last month little changed, while momentum stocks — those that are generally expected to grow faster than the broader market — tumbled after a massive repricing of the artificial intelligence trade. The iShares MSCI USA Momentum Factor ETF (MTUM) dropped 13% in July, its worst monthly performance since April 2022. The fact that the wider stock market held up reflects one thing: its ability to withstand shocks, with investors able to rotate among sectors, as needed. That has UBS excited about equities moving forward. “Though many try to find historic analogs, the July collapse in high momentum stocks with SPX flat is truly an anomaly with no real precedent since the ’90s,” wrote UBS strategist Keith Parker. “We see it as a healthy correction in an AI spend cycle that is just 2 yrs in (vs ~10yrs for prior Tech cycles).” The divergence between momentum and the broader market was an “outlier,” Parker added, highlighting two takeaways: “Broadening signs outside of AI was a critical condition for the reallocation within equities, and Institutional crowding amid retail buying and levered ETF products are a feature of the current momentum/market backdrop.” “Investors do not want to underweight AI/Tech, but non-AI ideas are a priority for portfolios,” he added. Signs of that broadening were seen Tuesday. Industrial giant Caterpillar rallied on strong earnings, while Palantir also surged on better-than-expected results.
