Momentum Trades like Palantir and AppLovin See Significant Declines: What’s Ahead?

In recent trading sessions, momentum stocks that have garnered immense popularity among retail investors, such as Palantir Technologies Inc. (PLTR) and AppLovin Corp. (APP), have seen their values unravel dramatically. The change in fortunes for these stocks adds to the ongoing challenges faced by the iShares MSCI USA Momentum Factor ETF (MTUM), which as of February 26, 2025, has essentially erased about half of its gains from earlier in the year.

The Current Landscape of Momentum Stocks

As of the market close on Tuesday, the MTUM ETF was only up by less than 5% year-to-date, according to data from FactSet. This downturn appears to reflect broader market sentiment, as retail traders increasingly engage in higher-risk strategies, exacerbating the selloff. Farzin Azarm, managing director at Mizuho Securities USA, warned that a substantial selloff is on the horizon that could impact many investors.

Understanding the Drivers Behind the Momentum Collapse

The selloff of these momentum stocks is alarming, but what is primarily driving this decline? Azarm emphasized a marked rise in the use of margin trading among retail investors, who borrow from their brokers to increase potential returns. This strategy can amplify losses, forcing traders to liquidate positions in order to cover margin calls, particularly when one trade doesn’t pan out. The cascading effect of such actions can send shares plummeting.

On a more nuanced level, market analysts point out that individual stocks are facing their unique challenges:

• Palantir Technologies (PLTR): The company faced headwinds following reports that the Trump administration plans to implement significant cuts to the Pentagon’s budget, unsettling investors reliant on government contracts.
• AppLovin Corp (APP): Once a top-performing stock, AppLovin recently experienced a downturn after a negative short report by Bear Cave raised concerns about its future growth prospects.
• Hims & Hers Health Inc. (HIMS): The stock took a hit after executives revealed a strategic pivot away from GLP-1 drugs after the FDA’s announcement of reduced shortages, leading to questions about future profitability.

Broader Market Trends and Other Affected Stocks

The repercussions of this momentum selloff extend beyond Palantir, AppLovin, and Hims & Hers. Other notable momentum stocks also faced declines. MicroStrategy Inc. (MSTR), closely tied to bitcoin’s performance, fell over 11% on Tuesday alone and has plummeted around 30% since late last year, paralleling the cryptocurrency’s slump to its lowest levels since November. Additionally, Meta Platforms Inc. (META), a central component of the MTUM ETF, saw its share price drop by nearly half, effectively erasing gains from a robust 20-day winning streak.

Varied Perspectives on Market Recovery

Despite the prevailing bearish sentiment underscored by analysts like Azarm, others have taken a more optimistic stance. Tom Lee from Fundstrat characterized the ongoing downturn in momentum stocks as merely a “flesh wound,” suggesting that investors should not be overly concerned about the current downward trajectory.

The Road Ahead for Momentum Investors

As we move further into 2025, investors should brace themselves for continued volatility among momentum stocks. While some experts believe a recovery may be on the horizon, driven by fundamental company performance, others caution that the conditions prompting the recent selloff—especially the use of margin trading among retail investors—could lead to persistent downward pressure.

In conclusion, while the short-term outlook for popular momentum stocks like Palantir and AppLovin seems bleak, the long-term recovery will depend on broader market conditions, individual business performances, and the financial strategies employed by retail investors. Staying attuned to these developments is essential for anyone looking to navigate the complex world of momentum trading.