The Pullback Is Nearly Over: Wall Street Serves Up Reassurances as BofA Urges Buying U.S. Momentum Stocks

 

As concerns over the sustainability of the AI boom intensified, U.S. AI-related equities recently suffered a sharp correction. However, Wall Street investment banks have taken turns signaling that a turning point has arrived, seeking to dispel investor anxiety.

 

Bank of America’s trading desk is advising clients to buy U.S. momentum stocks, arguing that following a wave of profit-taking, the sector's valuations have pulled back to attractive levels.

 

The core logic of momentum strategies is to buy outperforming equities—betting that trends will persist under the principle that "strength begets strength." AI and semiconductor stocks currently serve as the primary proxy for momentum in U.S. equity markets.

 

Weighed down by investors de-risking and systematic trading strategies (i.e., quant strategies) locking in profits, BofA’s U.S. Momentum Basket dropped over 10% last week from its June 25 peak. This decline puts the index on track for its second-worst July performance in nearly a decade.

 

However, BofA traders noted in a recent report that historical precedent suggests the current correction may be nearing its end. The bank highlighted that whenever this momentum basket experiences a drawdown exceeding 10%, it rebounds by an average of roughly 5% over the following month.

 

Seasonal tailwinds could provide additional support. BofA traders pointed out that over the past decade, August has consistently been the best-performing month for the momentum basket.

 

Currently, key holdings in the basket include SanDisk, Micron Technology, Danaher, Coinbase, and AMD, among others.

 

"Viewed through a historical lens—seasonality, past drawdown patterns, and post-selloff asymmetry—the evidence points to an ongoing profit-taking exercise rather than a structural shift, with a turning point likely close at hand," BofA traders wrote. "Statistically, the current weakness presents a compelling short-term entry point."

 

Regarding tactical execution, BofA traders recommend exposure via swaps or August-expiry call options on the U.S. High Momentum Index or the U.S. TMT (Tech, Media & Telecom) High Momentum Index.

 

They also emphasized that third-quarter corrections historically bottom out near the end of July, with subsequent rebounds typically coinciding with the peak of earnings season.

 

"If history repeats itself, the repricing of momentum equities will likely cluster around month-end," BofA's trading desk added.

Wall Street Chimes In

Other Wall Street desks are seeing signs of a market bottom as well, at least for the short term. Earlier this week, UBS's trading desk noted that the momentum selloff appears near its final stretch, opening the door for investors to re-engage with AI and semiconductor names.

 

Michael Romano, Head of Hedge Fund Equity Derivatives Sales at UBS, wrote in a client note that despite recent pullbacks, improving AI fundamentals signal a buy-the-dip opportunity. However, he recommended scaling into positions gradually rather than committing capital all at once.

 

Separately, Morgan Stanley advised clients in a Monday note that the recent selloff in U.S. memory chip stocks presents a buying opportunity, noting that shortages of data center memory chips continue to worsen despite mixed signals from other market segments.