Momentum Trade Moves into Bear Market Territory

Last week’s dominant story was the sharp unwinding of the momentum trade that has carried the market for months. The Philadelphia Semiconductor Index (SOX) declined 10 per cent over the week and is down 21 per cent from June’s peak. Bear markets are defined as drawdowns of 20 per cent or more. That weakness weighed heavily on the broader market: the S&P 500 declined 1.5 per cent, and the NASDAQ – more concentrated in the affected names – fell 2.9 per cent. The Dow Jones Industrial Average also slipped 0.9 per cent, a sign the selling pressure had broadened beyond just tech by the end of the week. No single catalyst drove the market lower. After the extended run of semiconductor stocks investors appeared to be rotating out of crowded positions.

Money moved into cyclical areas such as regional banks, retailers, and transportation, along with certain Big Tech names that had lagged the semiconductor rally. Apple (ticker: AAPL), which has been thought of as an AI laggard, rose 5.8 per cent for the week. Consumer staples (XLP) also drew inflows, gaining 2.9 per cent in Thursday’s session. Energy (XLE) was the top-performing sector (+5%) on news that the US blockade of the Strait of Hormuz would be reinstated.

Fixed income offered ballast during the volatility, with the Bloomberg US Aggregate Bond Index gaining 0.1 per cent for the week. Gold (GLD) moved in the opposite direction, falling 1.8 per cent. Renewed uncertainty tied to the Iran conflict and energy costs kept inflation and interest rate expectations elevated. Because gold generates no income, higher rate expectations increase the opportunity cost of holding it.

Fundamentally, the week’s news flow was constructive. The largest US banks posted standout results, aided by a wave of stock-market debuts, active trading desks, and growing demand for AI-related financing. June inflation data added to the encouraging picture, with headline CPI falling 0.4 per cent month over month, well below expectations. Core CPI held flat against forecasts for a modest increase. Producer prices also came in softer than expected on Thursday. Yet even this backdrop couldn’t stop the tape-driven damage. Sentiment was dealt a final blow Friday when Chinese AI lab Moonshot released its Kimi K3 chatbot model, which it claims outperforms the newest release of Anthropic’s Claude. This renewed concerns that the enormous capital being poured into AI infrastructure might not translate into durable profits.

Looking ahead, investors will watch whether the rotation out of momentum stabilizes or extends further as earnings season continues. The durability of consumer strength, set against AI spending discipline, is likely to remain the market’s central tension in the weeks to come.