Did the World Cup kill the momentum trade?

Why it matters: A tumble in so-called momentum stocks — which worsened yesterday with a steep drop in semiconductors — has weighed heavily on the overall market since the S&P 500 peaked in early June.

Between the lines: The selloff in momentum — one of the "factors" that quants use to describe and organize the market according to certain well-established characteristics — came as retail traders cut their net buying activity sharply, Vanda Research wrote in a note this week.

What they're saying: "Daily retail net buying of single stocks remains at its lowest level since 2020, with the 21-day average sitting well below recent norms," Vanda Research said.

The intrigue: What accounts for the turndown?

• Here's a theory: Perhaps individual investors turned their speculative gaze to the global sports pageant that is the World Cup over the last few weeks.
• The tournament briefly pushed soccer to the fore of the American collective consciousness, simultaneously setting off a surge in prediction market sports betting.

Case in point: Prediction market Kalshi saw downloads on Apple's App Store surge during the tournament, which stretched from June 11 to the final on July 19, when Spain defeated Argentina in a 1-0 extra-time battle.

Zoom in: The timing of the turndown in stock buying and an uptick in sports betting suggests that some saw taking bets on soccer as a fungible form of gambling with market speculation.

Yes, but: To be clear, correlation is not proof of causation.

• There were a lot of other things going on outside the World Cup in June and July, from the signing and subsequent collapse a couple days later of the Trump administration's initial MOU with Iran to the SpaceX IPO to the first interest rate decision under the Federal Reserve's new tight-lipped Warsh.
• Some interpreted the Fed's decision to leave rates unchanged as potentially hawkish in the face of persistently high inflation that has already pushed long-term interest rates up sharply.

Context: Still, the disappearance of bullish individual investors over the last few weeks may offer a good example of a so-called brotation — that is, a shift in trading activity by the heavily male, risk-seeking ranks of retail traders out of one preferred asset and into another.

• The original brotation — the term was coined, it appears, by the Financial Times — was a bro-based shift out of crypto trades and into SpaceX's soaring stock when it made its market debut.

Investors are rethinking their fondness for AI picks and shovels: the chipmakers, particularly memory makers, that make up the backbone of the new tech buildout.

Why it matters: The chip stock frenzy pushed the U.S. market to all-time highs earlier this year.

By the numbers: Now, you can see the pullback across a bunch of indicators — broad and narrow.

• The tech-heavy Nasdaq 100 briefly flirted with correction territory yesterday — a drop of 10% or more, before finishing down 9.5% below its June 2 record closing high.

The Philadelphia Semiconductor Sector Index is down 4.5% over that time period.

• Sandisk, a flash-memory and storage company emblematic of the boom, is off 36%. (Still up near 300% for the year, though.)

"In markets these days, it seems like years happen in months, and the month of July has been a disaster for the semis," Bespoke Investment Group noted yesterday afternoon.

• South Korea's KOSPI stock index — Exhibit A of the memory boom — is down 34% in the last 25 trading days.
• Case in point: Chip darling SK Hynix reported a six-fold surge in quarterly profit earlier today, but its stock later dropped 19%, Bloomberg reports.

Reality check: Most of these stocks are still up for the year, and the broader market remains near all-time highs.

The big picture: Semiconductor and memory stocks got crazy high — parabolic increases — so some of what's happening now is momentum reversing. Beyond that, a couple of major factors appear to be at play:

Skittishness over spending. This surfaced last week, when Alphabet reported results for the second quarter.

• The search giant reported negative free cash flow — it spent $44.9 billion in capital expenditure in excess of the $39.1 billion in cash generated from its operations. Most of that went to AI infrastructure spending.

Chinese competition. New challengers from China are forcing investors to reconsider pricing power across sectors.

• Moonshot AI's Kimi K3 may disrupt the dominance of U.S. AI companies.
• And the blockbuster IPO of ChangXin Memory Technologies, or CXMT, suggested that memory chips may be in greater supply than previously understood.

Between the lines: Market psychology may have shifted here.

• "We flipped from all news being good news for AI to a 'let's look under some rocks and see what the risks are' mindset," Steve Sosnick, chief strategist at Interactive Brokers, tells Axios.

What to watch: Meta and Microsoft report earnings later today — it'll be telling to see how investors react to the companies' AI capex spending levels.