Investing.com -- The recent relief rally in the S&P 500 may not last, as JPMorgan analysts warn that momentum unwinds have further room to go and policy uncertainty continues to weigh on markets.
According to JPMorgan, the Long Momentum factor has experienced one of the fastest unwinds in 40 years, wiping out two years of gains in just three weeks.
The sell-off was concentrated in Mega-cap stocks, leading to a $5.8 trillion market cap decline in the S&P 500, with 40% of the drop attributed to the sharp sell-off in the top-performing momentum names.
“The buildup of extreme crowding and narrowing leadership over the last two years was supported by expectations of high(er)-for-longer rates, US Exceptionalism / AI, and a pro-growth election outcome," analysts wrote.
However, these narratives have come under pressure due to concerns over slowing growth, increased U.S. policy uncertainty, and recent AI sector developments.
JPMorgan notes that momentum stocks are shifting from Quality Growth to Low Volatility (Low Vol) names, such as Utilities, Insurance, and Financial Services, which have seen record-high valuations.
“The Momentum factor sell-off has seen a rotation out of crowded Quality Growth and into the safety of Low Volatility stocks,” they added.
Despite the shift, analysts caution against expecting a broad rotation into Value stocks, stating that “the US business cycle has not undergone an intra-cycle reset recently, nor is the Fed hinting at quickly easing monetary policy.”
While the worst of the momentum crash may be over in the short term, JPMorgan warns that if the market is undergoing a structural shift—such as a transition from higher-for-longer rates to an economic slowdown—the unwind is only one-third complete.