Palantir’s tumble creates another gut-check moment for AI momentum trade
The AI-centric parts of the momo trade and its biggest gainers off the lows are under pressure this morning.
The V-shaped recovery in US stocks off the lows has been a story of “meet the new boss, same as the old boss.”
The iShares MSCI USA Momentum Factor ETF has rallied nearly 20% since its April 8 lows, recovering not just the losses suffered in the wake of the Rose Garden reciprocal tariff announcement, but also much of the decline seen since February 19, when Walmart’s soft 2025 guidance kneecapped the momentum trade and marked the peak for the S&P 500.
But a similar dynamic to the Walmart-induced momentum meltdown might be brewing again on Tuesday: Palantir’s solid earnings failed to wow investors after the stock’s 68% surge in under a month, which played a key role in refueling the momentum trade.
The pain in momentum stocks is not confined to that company this morning. We’re seeing big retreats in the components of the momentum ETF that had done the best since the April 8 lows, as well other notable AI-adjacent names that are some of the biggest weights in the index:
All are doing worse than the SPDR S&P 500 ETF in early trading. These stocks are more volatile than the S&P 500, so you’d expect them to be down by more than the benchmark index, but most are also far underperforming their typical beta to the market, as well.
Zooming in on Palantir, we’ve got ourselves a clash of the titans: unrelenting retail buying is squaring off a potential break in a short-term trend that itself can engender more selling.
When a group of stocks stop going up when the reason to buy those stocks was, in short, because they were going up, well, we don’t have to look too far back in time to see what a risk that can become for the broad market.
