Momentum Stocks Plunged in July While the Broad Market Held Flat; UBS Remains Bullish on U.S. Equities
N.R. Finch
The S&P 500 ended July nearly flat, yet the iShares Momentum ETF (MTUM) plunged 13% — its worst month since April 2022. UBS calls the rare divergence a sign of healthy sector rotation, not systemic risk, and stays bullish on US equities.
Momentum collapsed — why didn't the market follow?
MTUM, the ETF tracking the momentum factor, fell 13% in July — its worst monthly print since April 2022.
The S&P 500 closed the month nearly flat. This means → the market's previous high-flyers sold off hard, but the broad index held its ground.
UBS strategist Keith Parker called the divergence "a truly unprecedented anomaly going back to the 1990s."
Why does UBS call this a "healthy pullback"?
Parker framed it as a healthy pullback within the AI capex cycle. His key argument: the current AI cycle is only about two years old, while prior tech cycles typically lasted around a decade.
In plain terms = AI is far from over; the stocks that ran hardest are simply catching their breath.
He highlighted two structural points: first, strength outside AI is a prerequisite for capital to reallocate within equities; second, institutional crowding plus retail inflows and leveraged-ETF products explain why momentum names had stretched so far.
Where is the money going instead?
Parker noted that "investors are unwilling to underweight AI/tech, but non-AI names have become the portfolio priority."
Recent earnings confirm the shift: industrial giant Caterpillar surged on strong results, and Palantir rallied on a beat — both sit outside the core AI trade.
This reflects capital staying in equities but rotating from the crowded AI lane toward sectors with higher earnings visibility.
Can this rotation last?
UBS's core logic: the broad market's resilience during a violent momentum sell-off proves investors can rotate across sectors rather than exit altogether.
This means → as long as money reshuffles within equities instead of fleeing, the index has a floor.
UBS attaches a condition, however: the rotation's durability depends on non-AI sectors continuing to deliver on earnings expectations — if the new destinations disappoint too, rotation turns into a broad decline.
Content is for reference only, not financial advice.