UBS bullish after S&P 500 flat in July despite 13% momentum stock drop

The S&P 500 closed July essentially unchanged, yet the iShares MSCI USA Momentum Factor ETF (MTUM) plunged 13% – its worst monthly drop since April 2022 – a divergence UBS calls “truly unprecedented since the 1990s” and a catalyst for its bullish stance on equities【4】.

Market backdrop and UBS’s view

July’s flat S&P 500 performance masks a sharp sector rotation. While the broad index held its ground, high‑growth “momentum” stocks – those expected to outpace the market – suffered a steep repricing as AI‑related valuations corrected. UBS strategist Keith Parker highlighted that the 13% MTUM decline, paired with a flat S&P 500, “has no real precedent since the ’90s,” and interprets it as a “healthy correction in an AI spend cycle that is just 2 years in (vs ~10 years for prior Tech cycles)”【4】.

The broader market reacted positively to the resilience of the index. The Dow Jones added 900 points, pushing its four‑session rally past 2,500 points, while the Nasdaq rose 2.6% and the S&P 500 gained 1.8% on the same day【1】. These gains underscore investor confidence that the equity market can absorb sector‑specific shocks and continue to rotate among sectors as needed.

Why the momentum slump matters

Momentum funds, which track stocks with rapid earnings growth, have been a key driver of the AI‑centric rally that began in early 2023. The abrupt 13% drop in MTUM reflects a “massive repricing of the artificial intelligence trade,” suggesting that investors are reassessing growth expectations after a period of exuberant spending on AI infrastructure【4】. UBS sees this as an outlier rather than a systemic weakness, arguing that the broader market’s stability indicates depth and flexibility.

The divergence also offers a potential entry point for value‑oriented investors, as the correction may lower valuations for high‑growth names without dragging down the overall market. UBS’s optimism is rooted in the belief that the equity market’s ability to “withstand shocks” will support continued sector rotation and prevent a broader sell‑off【4】.

What to watch

• U.S. CPI data scheduled for mid‑September – a higher‑than‑expected reading could reignite rate‑sensitivity and test the market’s resilience.
• Upcoming earnings reports from leading AI‑exposed firms (e.g., Nvidia, Microsoft) – guidance that deviates from consensus may amplify the momentum‑vs‑broad‑market split.
• Federal Reserve policy cues in the next FOMC meeting – any shift in rate outlook could influence risk appetite and the pace of sector rotation.

The July episode highlights a rare market pattern: a flat major index alongside a steep fall in high‑growth stocks. Whether this signals a temporary correction or the start of a longer‑term shift in AI spending cycles remains to be seen, making the next wave of macro data and earnings a critical barometer for equity outlooks.