Factor volatility rose significantly in Q2 2026. High-risk stocks (those that rank highest in terms of price volatility) and high-momentum stocks (the leaders of the last 12 months) soared while value stocks lagged,1 driving a divergence only seen at historic market turning points.2
Such sharp swings in factor performance are typically a sign of underlying market instability—even if, on the surface, markets appear to be relatively calm. But a closer look at this factor volatility at the start of Q3 reveals something even more unusual: a negative correlation between the behavior of high-risk stocks and low-risk stocks.
Typically, different style and risk buckets tend to have correlations of at least 50% or 60%, with an average closer to 80%. This is because stocks tend to move in a similar fashion in response to external events, like job market data releases or rate hike announcements.
But now, we are seeing a negative correlation (-34%) between high-risk stocks and low-risk stocks in the US market (Exhibit 1).3 The last time we saw this correlation drop unusually low was at the peak of the dotcom bubble in early 2000—and even then, it remained above 0%.
EXHIBIT 1
US High-Risk, Low-Risk Correlation Went Negative in July
As of 31 July 2026
Source: FactSet
This shift is also visible in sector data. After years of the market crowding toward AI beneficiaries and moving away from defensive “old economy” stocks—a phenomena we wrote about back in May—July saw investors move in the polar opposite direction. At its nadir—before a rebound in the last two trading days of the month—semiconductor stocks (which tend to include higher-risk, higher-momentum stocks) were down 18.3%, while consumer staples stocks (which tend to include lower-risk, lower-momentum stocks) were up 4.6% in July.4
We believe this moment could offer investors an extremely rare opportunity for diversification against wider market risks.
If there is a reversal in AI sentiment, index losses will be significant in both emerging markets and developed markets, where tech weight peaked at 45% and 30%, respectively, in Q2. But investors do not need to choose between pro-AI and anti-AI trades. Rather, those who believe strongly in AI can remain invested—while also hedging the risk of a reversal by buying defensive “old economy” stocks that have been largely ignored for years.
In other words, we believe the current market dynamic may allow investors to position themselves for the best and worst case scenarios.
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Important Information
Published on 06 August 2026.
1 Stocks are ranked into quintiles based on 12-month price volatility, where the top 20% are considered high-risk and the bottom 20% are considered low risk. High-momentum stocks are the market leaders of the prior 12 months. Value stocks are stocks that are believed to be underpriced.
2 As of 31 July 2026. Based on the rolling annualized 63-day volatility averaged across momentum and risk metrics for Japan, US, and EM markets. Source: Lazard, FactSet, MSCI
3 As of 31 July 2026. Based on daily price volatility of 460 high-risk stocks and 460 low-risk stocks over the last three months.
4 Source: FactSet. As of 29 July 2026.
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