The collapse of momentum investing is unfolding in U.S. markets. Alongside the decline in the S&P 500 Momentum Index, the loss of momentum in semiconductor stocks, Moderna's surge and the impact of excessive leverage have come to light.
As major indexes continue to decline in U.S. equity markets, the concentration of capital in momentum-oriented investments is beginning to unravel. Although the market as a whole appeared to remain near record highs in August, the underlying data indicate that momentum investing was in fact already collapsing. As a result, the flow of funds into winning stocks is beginning to weaken. Individual stock movements also show pronounced localized activity driven by overheating in AI-related stocks.
The first factor is the loss of momentum in semiconductor stocks. Semiconductor stocks occupied the top positions in the Momentum Index in the first half of the previous year, but by 3Q they had fallen to the bottom of the constituent rankings, raising concerns about excessive investment in AI-related stocks. Share price declines became pronounced after peaking in July, as high valuations and the burden of capital expenditure weighed on the stocks.
The second factor is the reversal in biotech stocks. Moderna surged after announcing clinical results for a melanoma vaccine, creating a situation in which short sellers' losses expanded. Moderna's sharp rise had a major impact on investors using short-oriented strategies and became a factor undermining momentum investing. The movement is still drawing in other stocks that are following the trend.
The third factor is the growing impact of leverage. The vulnerability of long-short strategies, which use borrowed funds to increase positions, became evident, and losses expanded as AI trading stalled. This created a situation in which pressure from margin trading intensified, including demands from lending banks for additional collateral.
As for the outlook, some believe it is too early to write off momentum investing completely, given the example of a recovery after the DeepSeek shock. A sharp rebound in lagging stocks could drive momentum investing again, but the concentration in winning stocks and the resulting exposure of market vulnerabilities will remain key points of focus.