Momentum investing may be poised for a rebound following a significant decline, according to Morgan Stanley strategist Michael Wilson. The semiconductor sector experienced a sharp selloff, with the VanEck Semiconductor ETF (SMH) down nearly 17% in July—its worst monthly performance since the 2008 financial crisis—as investors reassessed AI-related valuations amidst rising interest rates.
The decline in semiconductor stocks, which fell about 35% from their June peak, has pushed many to low valuations, potentially creating an attractive entry point for investors. Key indicators show that while momentum has weakened, signs of improvement are observed, with the 14-day Relative Strength Index (RSI) for the SMH ETF rising to around 55.6, suggesting potential for further recovery, provided earnings momentum remains strong.
Despite concerns over AI spending, major tech firms continue to invest heavily in AI infrastructure, bolstering confidence in the sector. Wall Street strategists from Goldman Sachs and JPMorgan Chase believe the semiconductor correction may soon end, highlighting oversold conditions and upcoming earnings momentum that could stabilize prices in the sector.
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