Are your megacap stocks suddenly feeling a little shaky? You're not alone. The market's high-flying momentum trade, which has propelled many top stocks to incredible heights, is showing signs of fatigue. It's not just the risky, speculative plays anymore; even the giants are starting to stumble. But here's where it gets controversial... is this a temporary pullback, or the beginning of a larger correction?
First, let's recap: We saw speculative stocks take a dive, then gold lost its luster. Now, the megacap components of the momentum trade are also looking wobbly. The iShares MSCI USA Momentum Factor ETF (MTUM), a popular fund that tracks stocks with the best recent risk-adjusted price performance, is underperforming the broader SPDR S&P 500 ETF (SPY). As of mid-morning, MTUM was trailing SPY by more than 1 percentage point, and the gap could widen.
To put it plainly, the 'momentum trade' is losing momentum. This ETF essentially bets on stocks that have been doing well recently, assuming they'll continue to do so. Think of it like surfing a wave – you want to ride the stocks that are already surging upward. When that wave starts to flatten, as it appears to be doing now, the ETF's performance suffers.
Looking under the hood, over 20% of MTUM's 125 holdings were down more than 2% during the same period. Big names like Netflix, Carvana, GE Vernova, Rocket Lab, Quanta Services, and even Robinhood Markets (parent company of Sherwood Media) were among the biggest losers. This widespread decline suggests a broader shift in investor sentiment, not just isolated incidents.
And this is the part most people miss... this isn't just a one-day blip. The momentum ETF is currently experiencing its seventh consecutive session of underperforming the S&P 500. That's the longest streak of underperformance since the fourth quarter of 2023. This sustained weakness raises serious questions about the sustainability of the recent market rally.
So, what's driving this sudden change of fortune? One potential catalyst is the negative reaction to recent earnings reports from companies like GE Vernova and Netflix, both of which are MTUM holdings. These disappointing results may have triggered a broader reassessment of momentum stocks, similar to how Walmart's weak outlook earlier this year dragged down the entire group and the overall market. Think of it as a domino effect: one big stock falters, and others follow.
Beyond the megacaps, other areas of the market are also feeling the pressure. Stocks tied to the nuclear-powered AI trade, such as Oklo, Nano Nuclear, and Centrus Energy, are getting hammered. JPMorgan estimates that retail traders have already dumped millions of dollars worth of Oklo shares.
The Financial Times published a critical piece examining Oklo's prospects, highlighting the company's lack of revenue and its ambitious plans to build smaller nuclear reactors using liquid sodium. The article pointed out the failures of similar projects in the past and raised concerns about the proliferation risks associated with plutonium falling into private hands. One expert even stated that the Nuclear Regulatory Commission deeming Oklo "beyond help should be a red flag." Liquid sodium, while potentially efficient, is also highly corrosive, flammable, and explosive on contact with air and water.
Retail traders are also selling off quantum computing stocks like Rigetti Computing and D-Wave Quantum after a significant run-up. JPMorgan estimates that retail traders are net sellers of single stocks to the tune of hundreds of millions of dollars, with quantum stocks seeing some of the largest outflows. These companies, while promising, are still in the early stages of commercialization, making them particularly vulnerable to shifts in investor sentiment.
However, not all news is bad. Intuitive Surgical, the maker of robotic surgical systems, saw its shares soar after reporting strong Q3 earnings. The company beat expectations on both earnings per share and revenue, driven by strong demand for its da Vinci and Ion systems. Analysts responded with a wave of upgrades, raising their price targets on the stock. This demonstrates that strong fundamentals can still drive positive performance, even in a challenging market environment.
While some areas of the market are struggling, others are thriving. The key takeaway is that the momentum trade, which has been a major driver of market gains, is facing headwinds. Whether this is a temporary hiccup or the start of something more significant remains to be seen. But one thing is clear: investors need to be more selective and focus on companies with strong fundamentals and clear growth prospects.
Now, let's open the floor for discussion. Do you think the momentum trade is truly unwinding, or is this just a temporary pullback? Are you adjusting your portfolio in response to these market shifts? What sectors or individual stocks do you see as having the most potential in the current environment? Share your thoughts and predictions in the comments below!
