Momentum Trade Unravels Amid Earnings Season Jitters and Renewed Trade Concerns

Markets pulled back broadly Wednesday, led by a selloff in speculative assets and high-momentum names. Equities gave up recent gains as disappointing earnings from Netflix and Texas Instruments weighed on sentiment. A potential new round of U.S.-China trade restrictions also spooked investors. The Nasdaq 100 underperformed, while small caps saw heavier losses. Crypto and gold both sold off, with traders unwinding crowded positions. Despite this volatility, corporate earnings trends remain broadly positive, and optimism lingers for a year-end rally supported by AI spending, seasonal strength, and a dovish Fed.

Key Headlines & Market Movers

• Momentum Trade Unwinds: Momentum-fueled assets, AI stocks, crypto, and gold, tumbled as traders rotated out of overheated trades. Bitcoin dropped 2.7%, gold fell as much as 2.9%, and the Bloomberg US Pure Momentum Index continued to slide. This follows a multi-month surge driven by retail and quant-driven strategies, which now appear overextended. Strategists warn that while the correction may be painful, it’s a healthy sign for longer-term market balance.

Earnings Disappointments Hit Big Names: Netflix fell 10% after a weaker-than-expected profit due to a Brazil tax dispute, despite strong user metrics. Texas Instruments dropped 5.6% on a cautious outlook, raising concerns about chip sector recovery. In contrast, Intuitive Surgical surged 14% after upbeat results and raised guidance. Tesla and IBM reported after the close, with investors eyeing Tesla’s falling profits and sky-high valuation in particular.

• Geopolitical and Trade Risks Resurface: Markets briefly stabilized before selling resumed following reports that the White House may limit software exports to China, adding to broader trade friction concerns. Treasury Secretary Bessent’s comments about intensifying Russia sanctions also contributed to the defensive tone. With political and macro risks reemerging, investors sought safety in sectors like consumer staples and real estate.
• Earnings Beats Support the Bull Case: Despite headline disappointments, a large share of S&P 500 companies are beating estimates, at the highest rate since 2021, even as analyst expectations have risen. Strategists at JPMorgan and Fundstrat argue this resilience, combined with AI investment, a dovish Fed, and solid consumer demand, supports a constructive outlook. Fundstrat’s Tom Lee reiterated his S&P 500 year-end target of 7,000-7,500, citing strong fundamentals and seasonal tailwinds.

S&P 500 Sector Performance

Looking Ahead

With earnings season ramping up, results from megacap tech names will be pivotal. Watch for Tesla’s commentary on robotaxis, as well as upcoming reports from Microsoft, Alphabet, and Amazon. Meanwhile, trade headlines and the ongoing government shutdown remain potential curveballs. While choppy sessions may persist, strong corporate results and a favorable macro backdrop suggest pullbacks may continue to be buying opportunities, particularly if key support levels like the 50-day moving average hold.

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