Most Severe Unwinding Since 2001! Momentum Trade in U.S. Stocks Hits a Wall – Experts: Rotation, Not Collapse

The momentum trade, the hottest trend in U.S. stocks this year, has recently faced its most intense unwinding in over two decades. Stocks that led the rally earlier in the year are now under pressure, while previously overlooked sectors are attracting fresh capital.

So far, this selling pressure has had limited impact on the overall market. Even as popular semiconductor stocks are being sold off, money continues to flow into other sectors, providing support to the broader indices. As of Wednesday’s (15th) closing, the S&P 500 was just 0.5% below its all-time closing high set in early June.

The momentum trade heated up rapidly at the start of Q2, as the market rebounded from a downturn triggered by the Iran war. However, historical data shows that July is often a weak month for momentum stocks, and this year appears to be no exception.

Goldman Sachs noted on Monday that the index tracking the momentum factor has seen its worst underperformance relative to the S&P 500 in nearly three weeks since the early 2000s.

"Market leadership has been tested over the past three weeks, with the momentum factor experiencing its most severe selling pressure since the early 2000s," said Goldman Sachs strategists.

According to Dow Jones market data through July 7, the S&P 500 Momentum Index fell nearly 8 percentage points more than the broader S&P 500 from its July 15 peak—the largest three-week gap since March 2001.

Although there has been a slight rebound since, momentum stocks remain under pressure. Even as the S&P 500 closed higher on Wednesday, the S&P 500 Momentum Index declined, potentially marking its third negative week in four.

Nevertheless, Goldman Sachs emphasized that this unwinding has so far had minimal impact on the overall equity market. As hot sectors cool, others are strengthening, keeping U.S. equities broadly stable.

The Invesco S&P 500 Momentum ETF (SPMO-US), which tracks high-momentum large-cap stocks, has fallen 7.1% in July through Wednesday, on track for its worst monthly performance since March 2025, when it dropped 7.3%.

Chris Galipeau, Chief Market Strategist at Franklin Templeton Institute, described the move as a "rotation, not detonation." With the S&P 500 still near all-time highs, investors are rotating out of overvalued semiconductor stocks and into financials and large-cap tech.

The S&P 500 has risen 1% this month through Wednesday and is up 10.6% year-to-date. Financials have surged 5.3% in July alone.

Galipeau attributed this to strong earnings from major Wall Street banks on Tuesday and better-than-expected results from BlackRock (BLK-US), the world’s largest asset manager, on Wednesday.

Meanwhile, the "Magnificent Seven" tech giants have regained strength. The Roundhill Magnificent Seven ETF (MAGS-US), holding NVIDIA (NVDA-US), Apple (AAPL-US), Alphabet (GOOGL-US), Microsoft (MSFT-US), Amazon (AMZN-US), and Meta Platforms (META-US), has risen 7.3% in July through Wednesday, fully recovering from its 9.1% drop in June.

Semiconductor stocks, a key driver of momentum trades this year, have clearly weakened in July. The Philadelphia Semiconductor Index has fallen 13% this month through Wednesday. Even after the correction, the Invesco PHLX Semiconductor ETF (SOXQ-US), which tracks the index, is still up 75% year-to-date.

In addition to the S&P 500, both the Dow Jones Industrial Average and the Nasdaq Composite Index closed higher on Wednesday, despite intraday volatility. Galipeau said, "Right now, it’s just the overheated semiconductor segment cooling down, but the overall market remains very strong because corporate earnings are almost universally strong."