Is S&P 500 momentum faltering?

The momentum driving the S&P 500 may be showing signs of faltering, according to a recent analysis from Sevens Research.

Despite a lack of significant negative news, stocks declined moderately on Wednesday, with concerns emerging about the performance of recent momentum-driven names.

One of the key examples highlighted by Sevens Research is Abercrombie & Fitch, a stock that they point to as one of the market's top performers.

"Yesterday's earnings results and guidance were strong. However, despite the beat and guidance raise, it wasn't enough and ANF declined 17% as momentum investors exited the name, as the company's results simply couldn't match the intense expectations built into the stock," wrote Sevens.

They add that a similar scenario played out with Nvidia (NASDAQ:NVDA ), another momentum-driven stock.

While NVDA reported earnings and revenues that exceeded estimates, the stock still dropped by 3% post-earnings and continued to decline during the conference call.

Sevens Research pointed out that although NVDA's earnings beat estimates by less than 5%, compared to a minimum of 9% in the past six quarters, this smaller margin of outperformance raised concerns among investors.

Sevens Research notes that while super-cap and AI tech stocks have rallied, their performance hasn't matched the levels seen earlier in 2024, leading to doubts about whether the market can continue to rise if these momentum names don't carry the S&P 500 higher.

Sevens also question where the necessary leadership will come from in a slowing growth and falling-yield environment, which typically benefits defensive sectors and value stocks.

"If this market is going to move substantially higher (like S&P 500 towards 5,800), it needs to have the momentum names trading well, and recently, that simply hasn't been the case," they add.

Sevens Research cautions. If this trend persists, it could represent an "incremental negative" that investors should not overlook.

Source: Investing.com