Momentum Stocks Plunge 1.15% as Tech Giants Face Heavy Selling

The first trading day of the second half of the year saw a significant shift in the U.S. stock market, with many of the first-half winners experiencing substantial declines. This marked the largest scale of momentum stock liquidation since the January surge, with AI-related trades facing heavy selling pressure. The market's reaction was driven by several factors, including the reallocation of funds at the start of the third quarter, the latest comments from Federal Reserve Chairman Jerome Powell, and investors taking profits ahead of the employment data release.

The market's performance was mixed, with the Dow Jones Industrial Average rising by 400 points, while the Nasdaq Composite Index fell by 0.82%. The technology sector, which had led the year's gains, saw significant declines. The U.S. Technology Seven Giants Index fell by 1.15%, with major tech companies such as Sea Limited, Spotify, Roblox, NVIDIA, Broadcom, AMD, Netflix, and Meta all experiencing notable drops. This shift was described as a "violent" unwinding of momentum trades, driven by the reversal of year-to-date winners.

In contrast, sectors that had underperformed earlier in the year, such as tariff-impacted stocks and real estate, saw significant gains. The market was also anticipating a resolution to the trade tensions between the U.S. and its partners, as the 90-day tariff pause imposed by the Trump administration was set to expire the following week. The market's reaction to these developments highlighted the sensitivity of investors to changes in trade policy and economic indicators.

The market's shift was also influenced by broader economic indicators. The Federal Reserve Chairman's comments on the impact of tariffs on monetary policy added to the market's uncertainty. He noted that if not for the tariffs, the Federal Reserve might have already cut interest rates again. Any future actions, he said, would depend on the data, but he did not directly address whether July was too early for such a move. These comments pushed up U.S. Treasury yields, particularly at the long end.

In contrast to the technology sector, the healthcare sector saw strong gains. Companies such as Amgen and UnitedHealth Group rose by more than 4%, Merck rose by over 3%, and Johnson & Johnson rose by approximately 2%, driving the Dow Jones Industrial Average higher. The healthcare sector had underperformed the S&P 500 in the second quarter, making it particularly resilient in the market rotation. Sub-sectors such as managed care, pharmaceuticals, and medical devices all saw gains of 2-3%.

The consumer discretionary sector also benefited from the market rotation. Non-essential consumer goods, which had been the most net sold sector in the year, saw gains. Stocks that had been heavily shorted, such as American Eagle Outfitters and Abercrombie & Fitch, rose, while heavily held stocks like Ralph Lauren performed poorly. This shift highlighted the market's sensitivity to changes in investor sentiment and economic indicators.