A noticeable shift has been reshaping US equities in the month of July: Some of the biggest laggards from the first half are now outperforming, while the year’s early winners are falling out of favor.
Investors are taking profits and pivoting into underperforming sectors, fueling a reversal that’s turned energy — one of the biggest losers in the S&P 500 Index in the first six months of the year — into July’s top gainer, according to data compiled by Bloomberg. Meanwhile, communication services has swung from second-best gainer in the first half to the worst performer this month.
“At a high level, we would say some of the themes have gone a bit too far, namely AI, US dollar weakness, fall in long rates and expectations for rate cuts,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute. “It seems like we’re on the cusp of at least some profit-taking, but could turn into a full reversal.”
Stretched valuations are partly to blame for the rotation. Industrials, the biggest winner in the first half of the year that’s trailing sectors like energy and materials in July, has a price-to-earnings multiple that sits in the top-second percentile of observations going back 20 years ago relative to that of the S&P 500, data compiled by Goldman Sachs Group Inc. show. Contrastingly, the valuation multiple of the energy group — the S&P 500’s top performer this month — is hovering near the bottom-third percentile of readings relative to the S&P 500.
“Valuations are elevated across most industries in the sector and our model suggests it has the lowest odds of substantial outperformance during the next six months,” Goldman’s analysts wrote in a note published Wednesday.
Unpredictability has been a theme for US equities since the beginning of the year. Events from China’s DeepSeek to President Donald Trump’s shifting trade agenda weighed on the S&P 500, but it managed to stage a comeback toward the tail end of the first half, closing in on a fresh record high.
After a strong three-month run, BCA Research’s Irene Tunkel said it made sense for investors to “lock in” gains ahead of the summer break.
“At the same time, the economic backdrop remains resilient, and investors are growing more comfortable rotating into cheaper, more economically sensitive areas of the market, such as energy, materials, and transportation,” Tunkel added. “The tax cuts embedded in the One Big Beautiful Bill Act also provide support to the consumer and industrial sectors.”
The Russell 1000 Index has seen a clear rotation out of first-half winners into the biggest losers, according to Bespoke Investment Group. The 20 worst-performing stocks over the first half have since gained 5.4% month-to-date through July 8, while the 20 best-performing names over the same period have fallen 2.1%.
“There has been some modest reversion of leadership,” said Todd Sohn, senior ETF strategist at Strategas Securities, adding traditional defensive sectors such as consumer staples and even insurers were “deteriorating on a relative basis.”
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