Inside Markets — Momentum Factor Unwind (again)

The momentum factor unwinds for a third time in calendar ’25 with the current drawdown measuring out to ~7% as of yesterday’s close. This compares to a median drawdown of -8.3% over the last five episodes. The current unwind is largely attributed to an MIT study on a lack of corporate AI returns and underwhelming consumer response to the release of GPT 5.0. Timing of the current rotation also matches our expectation that late-August liquidity conditions often result in random price gaps/greater single stock volatility. This dynamic tends to dilute the signal quality of price action, making the current move circumspect unless there is a spike of implied volatility (VIX>22).

Powell’s Jackson Hole address is likely to be inconsequential given that the Fed’s September policy decision is dependent on the August Jobs Report (9/5) and August CPI print (9/11). A broad monetary easing campaign usually delivers a broad-based equity rally with cyclical leadership. Historically, the path to a broad easing campaign and eventual cyclical recovery first requires a period of economic pain, which currently seems unlikely given healthy credit conditions.