Stock Market Rotation Is Driving Volatility, Not Weakness
Pockets of the market are showing weakness and extreme volatility. The broader market is not.
getty
The media loves volatility. After all, when individual stocks or entire sectors have intraday swings of 10%, there is plenty to talk about. Somebody is winning, somebody is losing, and every move becomes another reason to ask whether the market is about to crack. News of massive margin calls adds to the worry.
The problem is that headlines often describe what’s happening in a handful of stocks, not what’s happening in the market.
The truth is that at the index level, where most investors are actually invested, the equity market is remarkably boring. Don’t let the outsized moves in semiconductors or AI stocks fool you. The last month has been defined by rotation, not broad-based weakness.
Most Sectors Are Performing Very Well
Over the last month, the S&P 500 has gained just 0.6%. That’s essentially flat. On the surface, that doesn’t sound particularly interesting. But at the sector level, the story is very different.
The technology sector has been the clear underperformer. As of July 17, the State Street Technology Select ETF, led by semiconductor manufacturers, declined 5.4% over the last month. However, nearly every other major sector is rallying. Over the same period, healthcare stocks gained 7.4%, energy companies rose 6.4%, and financials climbed 4.5%.
1-month performance of sector ETFs through July 17, 2026
Koyfin; Garth Friesen
MORE FOR YOU
The reason the index has gone nowhere isn’t that everything is falling. It’s because semiconductors, with nearly a 20% weight in the S&P 500, are experiencing a 20% drawdown after an extremely powerful bull market run in the first half of the year. That’s not broad selling pressure. It’s rotation. Money isn’t leaving equities. It’s moving within them.
Another way to view the rotation is through the performance of investment factors. An investment factor is any quantifiable characteristic, such as value, size, or momentum, used to explain the risk and return in the market.
The reversal of the momentum trade is behind much of the recent pain. MTUM, the iShares MSCI USA Momentum Factor ETF, has underperformed the S&P 500 by roughly 8.5% over the last month. Its top three holdings are all semiconductor stocks: Micron Technology, Intel Corporation, Advanced Micro Devices.
Investors are rotating into other areas of the market that have lagged for most of the year. In the last few weeks, value stocks have outperformed the S&P 500 by approximately 2.6%, while small-cap stocks have beaten the index by more than 3%. That’s what rotation looks like.
Still, the environment feels uncomfortable for most investors. The drawdown in momentum is significant, but not uncommon. It’s the volatility that is making the move seem so extreme.
Stock Market Volatility Is Isolated
The realized 1-month volatility of momentum stocks compared to the S&P 500 is at a 10-year high. The headline stocks attracting the most attention are swinging around much more violently than the market itself. Investors naturally assume those moves represent the broader market, when in reality they are concentrated in a relatively small group of names.
The volatility of momentum stocks is extreme compared to the S&PP 500.
Koyfin; Garth Friesen
Notably, despite the weakness and volatility in AI-related stocks, the bull market remains intact. The iShares Semiconductor ETF, while it may have fallen 20% from its recent high, is still 38% above its 200-day moving average.
Dispersion Is High, Correlation Is Low
Another data point highlighting market rotation is that realized implied correlations remain near a 20-year low. Correlation simply measures how closely stocks move together.
When markets are genuinely weak, correlations tend to spike because investors sell everything at once. That’s what happened during the financial crisis, the pandemic, and other major corrections.
That’s not what’s happening today. Some stocks are falling. Others are making new highs. Low correlation is exactly what you would expect during a rotation. Stocks are moving around dramatically, but the broader market is relatively stable.
Of course, none of this means the market can’t correct from here. Leadership rotations sometimes coincide with broader market declines, particularly if earnings fail to meet expectations or economic conditions deteriorate.
But that’s not what the data is saying today.
It’s fair to debate who will ultimately win and lose from the next phase of the AI boom. Some of this year’s biggest winners may have gotten ahead of themselves and may continue correcting.
What isn’t supported by the evidence is the idea that volatility in a handful of high-profile stocks means the market itself is in trouble.
The financial media naturally focus on the biggest winners and losers because that’s where the drama is. Investors should focus on where the money is actually going.
Right now, it isn’t leaving the market. It’s rotating.