Momentum stocks in the US market have shifted from being one of the best-performing market trends over the past 12 months to one of the worst-performing factors since July. The iShares momentum ETF (MTUM) gained roughly 33% over the 12 months preceding July, outperforming the S&P 500's 20% gain, but has declined approximately 8% for the month through its recent lows. The selloff began June 22, shortly after the Federal Reserve under new chairman Kevin Warsh held interest rates steady on June 18, with the market interpreting the decision as signaling a higher likelihood of rate increases or reduced probability of cuts. Momentum stocks — defined as shares outperforming the broader market over roughly a year — historically struggle during transitions in interest rate direction, whether from falling to rising or rising to falling, as such shifts disrupt established market trends.
Momentum ETF Gained 33% Over 12 Months Before July Reversal
The iShares momentum ETF tracking stocks that qualify as "momentum" trades rose roughly 33% over the 12 months before the July selloff, according to the source data. This performance handily outperformed the S&P 500's 20% gain over the same period. Momentum stocks are characterized as shares that have been rising and outperforming the broader market for roughly a year, with academic research finding such trends have a tendency to persist.
Chip Stocks Drove Momentum Factor Gains Through June
Chip and memory stocks were among the biggest contributors to the momentum factor's outperformance in 2026 through June. Micron Technology rose more than 200%, while Intel followed closely behind. Advanced Micro Devices gained more than 140% during this period. These semiconductor stocks exemplified the momentum trend before the July reversal.
Momentum Selloff Started June 22 Following Fed Rate Decision
The momentum factor selloff began June 22, shortly after the Federal Reserve's June 18 decision to hold interest rates steady. Interest rates rose in the days following the announcement, with shorter-term rates topping out on June 22 — the same day the momentum selloff started. The market appeared to view the Fed under new chairman Kevin Warsh as more likely to raise interest rates or less likely to cut them than previously expected. Through their worst moments on Tuesday, the iShares MTUM fund was down a bit more than 11%, meeting the standard of a "correction" (typically considered a 10% drop). The ETF's roughly 8% decline for the month would mark its worst monthly showing since early 2022, when the Fed was also signaling rate increases to combat post-COVID inflation.
Interest Rate Transitions Historically Disrupt Momentum Factor
Research on how interest rates affect different market factors indicates the momentum factor struggles when there is a transition in interest rate direction, from falling to rising or rising to falling. The level of interest rates matters less than the general backdrop shifting, often due to economic surprises or changes in Federal Reserve behavior. Such transitional moments can trigger "momentum unwinds" by disrupting established market trends. Oil prices rose Wednesday on hostilities with Iran, which the source notes are important for inflation — a key factor in Fed decisions that can significantly impact US stocks.
FAQ
What caused the momentum factor selloff in US stocks starting June 22?
The momentum factor selloff began June 22, the same day shorter-term interest rates topped out following the Federal Reserve's June 18 decision to hold rates steady. The market interpreted the Fed's decision under new chairman Kevin Warsh as signaling a higher likelihood of rate increases or reduced probability of cuts, triggering a reversal in momentum stocks that had been outperforming for the prior 12 months.
How much did the iShares momentum ETF decline during the July selloff?
The iShares momentum ETF (MTUM) declined approximately 8% for the month through its recent lows, with the fund down a bit more than 11% at its worst moments on Tuesday. This would mark the ETF's worst monthly performance since early 2022, when the Federal Reserve was signaling rate increases to combat post-COVID inflation.
