A crowded AI trade finally pauses
July was a very interesting month in the stock market and included a violent reversal of the momentum factor outperformance that has been dominant for most of 2026. When positioning becomes as stretched and one-sided as the AI trade had become by late June, it doesn't take much to catalyze a sharp pullback, and that's what we got.
Fundamentally, there wasn't much bad news coming from the technology sector. Second-quarter earnings reports were quite strong in aggregate, with many companies beating estimates and raising their outlooks. But expectations had become so optimistic that even beat-and-raise reports weren't enough to continue propelling many stocks higher.
The momentum reversal offered a silver lining for the Natixis tactical models. Our active equity managers tend to focus on buying stocks they view as undervalued, often after periods of underperformance, and taking profits once those stocks rally beyond estimated fair value. This is the opposite of momentum investing. As momentum stocks came under pressure during July, many of the underperforming stocks our managers had been accumulating at attractive prices surged higher, creating outperformance.
The team continues to evaluate whether July represented a temporary positioning unwind or the beginning of a broader shift within the AI trade. Given the amount of AI capital investment still planned over the next several years, the team believes the AI theme remains intact even if leadership within the trade could change. Strong earnings from hyperscalers and improving visibility into how those companies may monetize AI investments could boost their relative performance within the technology sector in the months ahead.
July model performance
Tactical model performance was mixed in absolute terms on both a gross and net basis during July. Riskier models were generally positive for the month, while more conservative models were generally negative. Relative performance was positive across all models, with riskier portfolios outperforming their benchmarks by a wider margin than conservative portfolios. Active equity mutual fund strength was the primary driver of that outperformance.
For moderate-risk models, asset allocation contributed positively, style selection detracted, and manager selection was the largest source of excess return. The Loomis Sayles Growth Fund (LSGRX) delivered positive absolute returns despite its benchmark declining significantly during the month, while The Oakmark Fund (OAKMK) posted a strong rebound and outperformed its benchmark by a meaningful margin. These two funds accounted for most of the manager selection outperformance in July.
On the ETF side, positions in the American Industrial Renaissance ETF and Japanese equities detracted as both were affected by the reversal in AI-related momentum stocks. The net effect of ETF positioning was negative, although active mutual fund performance more than compensated for those headwinds.
Natixis model portfolio positioning
The Natixis tactical models made no changes to portfolio positioning during July. Rising earnings expectations and continued economic strength in the US support the team's preference for equities over bonds and US stocks over international markets. The team also continues to view the long-term AI investment cycle as supportive for equity markets, even if leadership within the theme evolves over time.
The team is monitoring opportunities in small caps and regional banks, while also paying closer attention to longer-term Treasuries as yields rise. Thirty-year US Treasury yields are now at levels last seen in 2007. After a difficult year for active managers, July demonstrated how quickly long-term, value-oriented investment processes can be rewarded when market leadership broadens beyond a narrow group of momentum stocks.
At month-end, model positioning was:
- Slightly overweight stocks versus bonds
- Overweight US stocks
- Tilted towards growth stocks versus value stocks
- Slightly underweight developed market international stocks
- Slightly underweight emerging market stocks
- Neutral duration
