Overview
European high-momentum stocks experienced a pronounced reversal in July, losing 14% relative to the broader market after enjoying a 23% outperformance through the first half of the year, according to a recent note from BofA Securities. The broker attributes the abrupt unwind largely to renewed skepticism over the monetization prospects for artificial intelligence and a sharp uptick in funding costs for hyperscale cloud providers.
The pattern observed in Europe echoed global moves among AI-sensitive indices. South Korea’s KOSPI has fallen roughly 38% from its peak, illustrating the breadth of the pullback in markets most exposed to generative AI excitement.
Key drivers identified
BofA points to a combination of factors that have undermined momentum names. A roughly 50 basis-point rise in U.S. real bond yields since May has added pressure to growth-oriented stocks. Beyond that, the bank singles out monetization uncertainty as the primary catalyst. That uncertainty includes unclear consumer willingness to pay for AI-driven services, intensifying competition at the model layer, rising input costs, and higher borrowing costs for major cloud providers.
Late in the most recent week, technology shares showed signs of recovery, prompting BofA to frame the central question: is the momentum unwind nearing its end?
Competing cases: upside and downside scenarios
On the bullish side, consensus forecasts for hyperscaler capital expenditure have been revised higher, at an annualized pace in excess of 100% over the past three months, BofA said. The bank also notes that the recent pullback has realigned semiconductor equities with expectations for AI-related capital spending after an earlier phase where semiconductors had outpaced those expectations.
Conversely, the bearish case is supported by the continuing slide in the Silicon Data Token Expenditure Index, which BofA describes as capturing a shift in customer spending away from expensive frontier AI models. The broker links this trend to underperformance among hyperscalers, and it highlights that major cloud and AI platform companies are now about 25% down relative to the broader market. Historically, BofA observes, weakness among hyperscalers has tended to precede softness among firms that benefit from AI capital expenditure by several months - a dynamic that could place further pressure on European technology names.
Positioning and sector moves
Despite an improvement in global macro data - with global macro surprises reaching a fresh three-year high, BofA notes - the broker remains moderately bearish on the momentum style. It expects that additional downside will be more limited following the sharp decline in July, and the bank is maintaining an underweight stance in semiconductors to reflect that view.
At the same time, BofA has recently upgraded mining and construction materials from underweight to marketweight. These two sectors had been swept up in the broader momentum sell-off and were re-rated as the broker reassessed relative exposures.
Takeaway
BofA frames the current market environment as a contest between a potential re-acceleration in hyperscaler capex expectations and ongoing signals of customer rotation away from high-cost frontier models. The net outcome will likely determine whether the rapid unwind that hit momentum stocks in July has run its course or whether further pressure remains for AI-exposed segments of the market.