Momentum a Powerful Ally for Stocks as Whiplash Rally Rolls On

The stock market’s recent volatility has been marked by a dramatic “whiplash rally,” with the S&P 500 rebounding sharply from its February 2025 peak amid shifting trade policies and sector rotations. While uncertainty lingers over tariff-driven economic headwinds, momentum continues to favor select sectors and companies, particularly those at the forefront of technological and structural shifts.

The Whiplash Rally: A Tale of Two Markets

The S&P 500’s year-to-date decline of -5.3% masks a stark divide: large-cap tech stocks like NVIDIA (-20.3%) and Microsoft (-11.6%) have cratered, while smaller companies and defensive sectors thrive. This divergence reflects a sector rotation driven by fears of stagflation and policy risks. Energy stocks, for instance, surged +9.3% in Q1 as natural gas prices spiked 40% over six months, while utilities and healthcare outperformed amid investor caution.

By April 2025, the S&P 500 erased early losses in a nine-day winning streak—the longest since 2004—driven by hopes of U.S.-India trade deals and optimism around corporate resilience. Yet, the index still closed April down 0.8%, underscoring the fragility of this recovery.

Momentum’s Double-Edged Sword

Morgan Stanley’s analysis warns of an impending reversal for 2024’s extreme momentum stocks, which outperformed by +28%—a two-standard-deviation event. Historically, such surges lead to near-full reversals within 12 months. High momentum sectors like Broad Tech (27% of the momentum basket) and Financials (24%) face heightened risk, particularly as regional banks grapple with regulatory scrutiny and prolonged high interest rates.

However, BlackRock’s bullish stance on U.S. equities hinges on structural tailwinds: AI-driven innovation, low-carbon transitions, and private market growth. The firm’s “stay pro-risk” strategy prioritizes U.S. tech giants and infrastructure plays, betting that corporate strength will outweigh macro headwinds.

Sector Litmus Tests: Q2 Earnings as a Barometer

Three key companies will define sector momentum in Q2:
1. Diversified Energy Company PLC (DEC): Its May 12 earnings will test whether natural gas firms can balance sustainability goals (well retirement, emissions cuts) with production growth. A drop below £3.50 could signal skepticism about its green transition.
2. Carr’s Group PLC: The agricultural firm’s May 7 results must prove margin expansion and geographic diversification can offset trade risks. A dividend hike above 4.5 pence/share would validate its shift to pure-play agriculture.
3. Directa Plus PLC: Its mid-May audited results will reveal if graphene innovation can scale, with revenue growth critical to its status as an industrial disruptor.

Risks Lurking in the Shadows

The rally faces three critical risks:
- Trade Escalation: U.S. tariffs on steel, aluminum, and Canadian energy exports have already triggered a -10.6% two-day selloff in March. Retaliatory measures could amplify inflation and disrupt global supply chains.
- Earnings Pressures: Companies like NVIDIA (-20.3% YTD) face margin squeezes from tariff-driven input costs. Morgan Stanley’s reversal thesis looms large for overvalued momentum stocks.
- Policy Uncertainty: The Federal Reserve’s reluctance to cut rates below 4% keeps long-term bond yields volatile, while geopolitical fragmentation fuels inflation.

Conclusion: Riding Momentum with Caution

The whiplash rally reflects a market torn between optimism and anxiety. While momentum continues to favor sectors aligned with structural trends—AI, energy transition, and private markets—investors must remain selective.

• Buy: U.S. tech leaders (e.g., NVIDIA, Microsoft) if earnings surprises materialize, and infrastructure equities benefiting from decarbonization.
• Avoid: Overvalued momentum stocks in cyclicals and sectors exposed to trade risks.
• Monitor: Q2 earnings from DEC, Carr’s, and Directa Plus to gauge sector resilience.

The S&P 500’s -9.5% decline from its February peak highlights the stakes: momentum may prevail, but only for companies that balance innovation with execution. As BlackRock notes, the path forward hinges on “financing the future”—a mantra that favors the bold but rewards the disciplined.

In this volatile landscape, investors must treat momentum as both ally and adversary: its power can lift portfolios, but its reversals demand vigilance.