Macro

Momentum Rules Market This Summer: S&P 500 Up 18%, Tech Stocks Lead

S&P 500 up 18%, Nasdaq up 22.6% YTD; Tech sector leads with 14% gain, but risks loom.

By Bill Bullington

7/11, 07:18 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Apple Inc.
Microsoft Corporation
iShares MSCI USA Momentum Factor ETF
NVIDIA Corporation
Invesco S&P 500 Momentum ETF
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Key Takeaway

  • The S&P 500 is up 18% YTD, driven by tech stocks, with only 58% of its constituents showing gains.
  • Momentum ETFs like Invesco S&P Momentum ETF (SPMO) and iShares USA Momentum Factor (MTUM) have surged 39.9% and 28.5%, respectively.
  • Despite strong performance in bull markets, momentum ETFs risk underperformance in down markets due to infrequent rebalancing.

Market Momentum and Tech Dominance

The summer of 2024 has been marked by significant momentum in the U.S. stock markets, particularly for passive investors. The S&P 500 and Nasdaq Composite have reached new highs, with the S&P 500 up 18% year-to-date and the Nasdaq Composite up 22.6%. This surge has been characterized by low volatility, which has been beneficial for passive investors but less so for active investors who thrive on high volatility and sector rotation. The market breadth has been flat to down, with only 58% of the stocks in the S&P 500 showing gains this year. Notably, only 20% of the index's constituents have matched or exceeded the index's 18% rise.

The technology sector has been the standout performer, with equal-weight S&P 500 sector ETFs showing a 14% increase in technology stocks. Other sectors like energy, utilities, and financials have seen modest gains of around 7%, while consumer staples and healthcare have lagged, down 3% and 1%, respectively. This uneven performance underscores the dominance of tech stocks in driving market gains.

Momentum Strategies and ETFs

Momentum investing has been a winning strategy this year, particularly for those holding stocks on a winning streak. The Invesco S&P 500 Momentum ETF (SPMO) and the iShares USA Momentum Factor (MTUM) have outperformed, with gains of 39.9% and 28.5%, respectively. These ETFs track indices that focus on stocks with high momentum scores, and their concentrated bets on top-performing tech stocks have paid off. For instance, SPMO's top holdings include Nvidia (13%), Apple (9.9%), and Microsoft (8.7%).

However, momentum strategies come with risks. Rebalancing and reconstituting these portfolios can be challenging due to the phenomenon of mean reversion, where stock prices tend to revert to their long-term average. SPMO and MTUM rebalance only twice a year, which can be slow in rapidly changing markets. As ETF Stream noted, "In a rapidly changing market environment, the [momentum] strategies can be slow to catch-up meaning any hope of outperformance, especially in the short term, is most likely wishful thinking."

Triple-Whammy Threat

Despite the current market euphoria, some strategists are warning of potential risks ahead. Bill Blain, a market strategist at Shard Capital, highlights a "triple-whammy threat" for U.S. stock investors: overvaluation driven by over-euphoria, a misunderstanding of economic realities, and political uncertainties. Blain compares the current market sentiment to climbing a mountain with false summits, suggesting that markets are prone to repeating past mistakes. He warns that "irrational hopes and expectations trump rationality at times like these," driven by greed and an abundance of capital in the U.S. markets.

Blain also points out the impact of normalized interest rates around 5%, which could lead to market distortions. Additionally, the upcoming U.S. election adds another layer of uncertainty, with potential volatility from political developments and election outcomes.