Momentum Has Peaked, the Expansion Hasn't: Why Markets Favor Stock Pickers
When the 10-year Treasury yield reached 5.31% on October 5, the worry was that rates had risen too far. When it eased to 4.94% by month-end, attention shifted to recession risk. A more useful reading is that the momentum behind large-cap growth stocks has peaked, while the broader economic expansion continues.
Signs the Momentum Trade Has Peaked
From October 6 to November 2, the Invesco QQQ, which tracks the Nasdaq-100, fell about 10%. The SPDR S&P 500 ETF fell roughly 3.5% over the same period. Selling hit hardest where momentum had been strongest. Intel posted a record one-day decline on October 30, and the Nasdaq-100 was on pace to lose more than $2 trillion in market value in October even as the Dow headed for a monthly gain.
Large investors are adjusting too. On October 13, BlackRock cut US stocks to neutral as a short-term risk-management step. It raised short-dated Treasuries to overweight and said its convictions on AI remain intact.
Two Clocks: Momentum and the Economy
Markets run on two clocks. The fast clock tracks momentum: bond yields, credit spreads, and which stocks are leading. The slow clock tracks the real economy: jobs, orders, and investment. Large investors tend to move money by the fast clock, which is why stocks can fall while economic data hold up.
Today the two clocks disagree. Fidelity's third-quarter update still describes the US as mid-cycle, yet the stocks that led the rally are being sold. Market leadership can change without anything breaking; money simply moves elsewhere. Large-cap indexes may take time to get back to their early-October highs.
Why This Isn't a Recession Call
The slow clock is still moving forward. Third-quarter GDP grew at a 3.4% annualized rate. Business fixed investment rose 12.7%, with equipment spending up 20.9% and data center construction up 127%. That spending keeps financing markets active and supports a long chain of suppliers.
The Conference Board's Leading Economic Index (LEI) was flat in September. However, its six-month growth rate turned positive at 0.6%, and it is not signaling a recession. The Board projects 2.2% growth this year and 2.0% in 2027.
On this reading, real recession risk is roughly six to 16 months away. The end of a bull market is not the start of a bear market. In between, there is usually a long, choppy stretch in which the indexes go sideways and stock selection matters most.
Where Capital Is Rotating
Money is already moving out of the former leaders and into sectors such as health care, while small caps have held roughly flat. That pattern points to a rotation rather than investors heading for the exits. Three areas stand out:
Suppliers to the biggest spenders: Micron plans to raise its capital spending by more than $10 billion in fiscal 2027. SK Hynix's CEO expects 2027 to be the tightest memory market on record. That spending flows to equipment, materials, and component makers, many of them mid-sized companies.
Data-rich industries: Health care's data is already well organized, so even mid-tier AI models can deliver results on modest research budgets.
Consumer companies using their own data: Lightweight AI can now handle much of the customer targeting that once required expensive consulting contracts.
The Russell 2000 fund is still about 8.5% below its August high, so this is not a call to buy the small-cap index. The opportunity lies in smaller companies that turn AI into real sales and margins.
The Midterms: Delay Rather Than Disruption
Ahead of the November 3 vote, prediction markets gave Democrats 94% odds of winning the House and 74% of winning the Senate. That makes divided government the base case. Market concerns center on tax policy, congressional oversight of the Iran conflict, and new rules for data centers.
Several limits reduce those risks:
Vetoes: Overriding a presidential veto requires two-thirds of both chambers, and no forecast puts that within reach.
Executive orders: Much policy advances through executive orders, and Congress would need separate legislation to block each one.
Likely net effect: A plausible outcome is that perhaps 30% of the administration's agenda is delayed rather than reversed.
Data centers: State-level proposals from candidates of both parties point to a slower, more regulated build-out rather than a halt.
Iran: The Congressional Budget Office (CBO) estimates the cost at $38 billion over six months, rising by about $3 billion a month. Because war-powers votes still face a veto, the more important lever is funding through the budget process. Markets would likely welcome a shift from escalation toward managing the conflict.
Positioning and Key Signposts
The approach is to change what you own rather than sell everything:
Less index, more selection: Favor smaller companies turning AI into sales and margins, suppliers to the chip and data center build-out, and health care.
Cash that earns: For the defensive part of the portfolio, 2-year Treasuries yield 4.56% with far less interest-rate risk than long-term bonds.
Patience on Korea: Wait for the selling in Korea's large chipmakers to run its course before adding.
Three developments would change this view:
Earlier recession risk: If the LEI's six-month growth rate turns negative while business investment stalls, recession risk would arrive sooner.
Momentum call too early: If large-cap indexes reach new highs with broad participation, the call that momentum has peaked would prove early.
More defensive stance: If a new Congress moves quickly on tax increases and spending cuts, a more defensive stance would be warranted.
This reflects one investor's positioning, not personal financial advice.