The momentum trade that powered the US stock market through the first half of 2026 is showing cracks, and Bloomberg US Equities Reporter Natalia Kniazhevich says the unwind is already underway.
On the July 3 Bloomberg Daybreak segment, Kniazhevich explained that “Momentum is the best-performing factor. It is up by 28% year to date. We see this momentum factor starting to fade now.” Her framing comes just after the Bureau of Labor Statistics delivered a softer-than-expected June payrolls report, forcing a rapid repricing of the Fed outlook.
A Weak Jobs Report Just Changed The Fed Narrative
June nonfarm payrolls came in at 57,000, well below estimates in the 100,000 to 110,000 range, though the unemployment rate ticked down to 4.2%, cushioning the blow. The BLS series shows total nonfarm employment at 158,984 thousand in June 2026, up from 158,927 thousand in May. Average hourly earnings continued to firm, printing at $37.64 in June, up from $36.36 a year earlier.
Traders responded by pushing July rate-hike odds to effectively zero and pricing only about 30 basis points of Fed moves by year-end. Bloomberg Executive Editor for Asian Markets Paul Dobson summarized the shift: “It takes the pressure off the Federal Reserve to raise interest rates any time fast. The market is not really expecting that to be a necessity anymore.” Marianne Zangerl, Aberdeen’s Global Head of Multi-Asset and Alternative Investment Solutions, went further, reaffirming that no hikes are coming through 2026: “Nothing in this report changes that view. We won’t see anything happen this year.”
The Fed funds target upper bound sits at 3.75%, unchanged since the December 10, 2025 cut. The 10-year Treasury yield closed at 4.48% on July 1, and the 2s-10s spread has compressed from 0.74% in early February to 0.35% currently, evidence that the curve is repricing growth risk rather than fresh inflation.
Momentum’s Record Run Is Starting To Fade
Kniazhevich flagged the seasonal setup behind the rotation: “People are taking profits ahead of July, August vacation time. Hedge funds have posted really strong performance,” adding that per Goldman Sachs it was one of the best quarters in history.
The Invesco QQQ Trust (NASDAQ:QQQ) is up 16% year-to-date but has slipped 4.5% over the past month. Small caps, by contrast, are outperforming, with the iShares Russell 2000 ETF (NYSEARCA:IWM) up 20.89% year to date and 2.03% higher over the last month. UK equities via the iShares MSCI United Kingdom ETF (NYSEARCA:EWU) are up 8.78% YTD and gained 2.79% in the past week, capturing the broadening trade Franklin Templeton and other 2026 outlooks have been calling for.
Volatility confirms the shift. The VIX spiked to 22.22 on June 10 before easing back to 16.59 on July 1, a pattern consistent with positioning cleanup rather than a broader risk-off event.
Retail Investors Aren’t Following Wall Street
Institutional selling is meeting a stubborn counterforce from retail demand. US retail traders set record activity in May and June, with cash equity trading volume roughly 65% higher than in 2025.
Those flows remain concentrated in AI, hyperscaler, and megacap tech names. It’s perhaps a bit concerning that those same industries are now facing pressure as hedge funds trim their winners in these sectors.
What This Means For Investors In The Second Half Of 2026
The market is heading into the summer with a clear tug-of-war. Institutional investors are rotating into cyclicals, small caps, and European equities, while retail traders continue to support the AI leaders. If wage growth continues and the Fed holds rates at 3.75%, leadership is likely to broaden rather than snap back overnight. For investors, the key question to ask today is which parts of the market are positioned to lead the next leg higher.
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