Wall Street's momentum trade—betting on rising winners and shorting laggards—has collapsed, with the S&P 500 Momentum Index tumbling more than 9% since July 1, lagging behind the S&P 500's 2.8% gain. The index, which soared 44% in Q2 and surged 133% over five years, is on track for its largest quarterly underperformance in 25 years. Matthew Tym of Cantor Fitzgerald described it as a 'self-fulfilling prophecy' that has suddenly turned against investors who used leverage and options to amplify returns.

The July collapse marks the second-worst month for momentum trading in around 40 years, with hedge funds suffering losses as AI darlings like Nvidia, Micron Technology, and Advanced Micro Devices reversed course. Agustin Lebron of Equi Libre notes that momentum strategies have worked for decades because information spreads slowly and behavioral biases cause investors to sell winners too early while holding losers too long.

Antti Ilmanen of AQR Capital Management remains undaunted, stating 'Any strategy has disappointing periods.' The recent surge in Moderna and other heavily shorted biotech stocks, up around 150% this month, devastated quant funds, with Goldman Sachs reporting the worst day for systematic long-short managers in over two years.