(Bloomberg) -- For two years, Wall Street traders have minted profits simply by chasing the hottest stocks in the market regardless of price, fundamentals or the economic backdrop. Those days appear to be over.
Suddenly, the equities universe has been afflicted by worries about shrinking growth and rising trade uncertainty brought on by President Donald Trump’s policies. And it’s killing the so-called momentum trade that’s been driving the latest stock market rally.
What that means is the technology, communications and consumer discretionary sectors led the S&P 500 Index in 2023 and 2024, but are at the bottom in 2025 as investors dump the shares. Meanwhile, typically safe areas of the stock market, like health care and consumer staples, are leading in 2025.
“When investors see a defense rally, they become even more defensive,” said JC O’Hara, chief market technician at Roth Capital Partners.
The S&P 500 tumbled again Thursday and after a hot start to the year is now down 0.3% for the 2025, underperforming benchmarks in Europe and even Canada. The US equities benchmark has lost 2.5% this week and 3% this month, and it’s just another 1.4% decline from wiping out all of it gains since Trump’s election.
Meanwhile, the blows keep coming for equity investors. Nvidia Corp. had its worst day since the DeepSeek rout on Thursday after posting more subdued growth than investors were hoping for. Economic data showed weakness in business activity, inflation expectations, consumer confidence and jobless claims. Bond traders are bidding up Treasuries in a bet that the Federal Reserve will have to pivot from fighting inflation to dealing with a slowing economy.
“The S&P 500 has welcomed lower yields, but when the drop is this fast and furious, investors’ first reaction is to ask what’s wrong,” O’Hara said, adding that as the market interprets the rally in bonds as a defensive move, it’s also hastening the rotation out of riskier, trend-chasing trades.
Investors’ skittishness is perhaps most apparent in the market’s riskiest niches.
A Goldman Sachs basket of unprofitable tech stocks is close to giving up all of its gains from a post-election speculative frenzy. A gauge of heavily shorted firms has sunk to levels it last traded at in October. A Bloomberg index that follows the seven biggest technology stocks is in correction territory. And a gauge tracking cryptocurrency stocks has erased all of its so-called “Trump bump.”
Individual investors, who typically crowd into momentum-driven speculative trades, are taking a break from their buying spree. Retail traders sold $1.1 billion of stocks in the first two hours of trading on Monday, the largest outflow at that time of the day since the pandemic collapse in March 2020, according to data from JPMorgan Chase & Co.
Overall, investor sentiment has turned extremely bearish, according to the latest Sentiment Survey from the American Association of Individual Investors. Expectations that stock prices will fall over the next six months soared over 20 percentage points to nearly 61% in the week ended Wednesday. To some Wall Street pros, an extreme swing like that is often a sign that a reversal may be coming.
Meanwhile, Bank of America’s global fund manager survey last week showed that despite the concerns investors continue to be long stocks.
“Given that the AAII Sentiment Indicator’s bull-bear spread is bearish and respondents of the BofA survey have conflicting views on the likelihood of a global recession and the valuation of US equities, the consensus on markets appears to be relatively neutral,” said George Smith, portfolio strategist for LPL Financial.
