Tech Momentum Plunges 40% in 17 Days; Goldman Says Rotation Nears End

Woofun AI reports that the technology momentum trading sector is undergoing its most severe collapse in recorded history, with the U.S. tech momentum factor (TMT MoMo) shedding 40% from its peak in just 17 trading days. This unprecedented drawdown, which spans semiconductors, hedge funds, and credit markets, has prompted a systematic review by Goldman Sachs partner and head of EMEA hedge fund business Mark Wilson. Wilson characterizes this "brutal rotation" as historically rare in both speed and depth, yet he argues that the root cause lies in crowded positions and concentrated leverage rather than any substantive deterioration in economic health or corporate earnings. While he asserts that the unwinding process of the momentum factor is "nearing its end," he cautions that there are currently no immediate catalysts to trigger a short-term market reversal.

The velocity and magnitude of this decline stand in stark contrast to historical norms, as highlighted by data from the Morgan Stanley Quantitative and Derivatives Strategy team (MS QDS). The current momentum factor drawdown, lasting 17 trading days with a peak-to-trough decline of 28%, significantly outpaces the historical median since 1999, which recorded a 22% drawdown over an average of 33 trading days. This means the present sell-off has surpassed historical averages in both speed and depth, marking the most severe episode since the 29% drawdown observed between December 2022 and February 2023. The situation within the tech sector is even more extreme, with the TMT MoMo factor’s 40% drop representing the fastest and deepest sell-off for tech momentum in history.

Sector-specific breakdowns reveal the breadth of the damage across global markets. The Korea Composite Stock Price Index (Kospi) has fallen 27% from its peak, while U.S. AI technology beneficiaries have dropped 25%. Global memory chip stocks have suffered a 36% decline, and European semiconductors have decreased by 23%.

Notably, memory chip stocks account for approximately two-thirds of the overall decline in these segments.

Meanwhile, broader AI beneficiary stocks have fallen about 24% from their highs, illustrating that the pressure is not isolated to a single niche but is pervasive across the technology supply chain.

Beneath the surface price declines, the internal risk structure of the market is disintegrating, characterized by extreme volatility divergence. The volatility of the Goldman Sachs high beta momentum portfolio (GSPRHIMO) is currently approximately 10 times that of the S&P 500 index volatility. In the past 20 years, such a disparity in volatility ratios has only been comparable to the period during the pandemic shock in November 2020.

Furthermore, the gap between individual stock volatility and index volatility has widened to historical extremes. Per Woofun AI, the average implied correlation of S&P 500 constituents over three months dropped to a historical low of 0.14 this week. This decoupling has kept S&P 500 index volatility low, while the average implied volatility of individual stocks reached 40%, which is 2.8 times the index implied volatility, setting a new historical record for fragmentation.

Despite the historic drawdown, positioning risks remain elevated, with hedge fund net exposure to momentum factors staying high from a long-term perspective. Data from JPMorgan indicates that the current combination of position levels and drawdown magnitude continues to make the momentum factor one of the most concerning core risks in the market. Goldman Sachs’ high beta momentum factor has dropped 33% from its June peak, with year-to-date gains plummeting from 60% to just 12%, a trend noted by Mark Wilson. He cited signs of deleveraging in the Korean market as evidence of the severity: reports indicate that this week, about 1 in every 30 adults in Korea had their stock margin accounts forcibly liquidated, demonstrating that the deleveraging process has been significantly underway.

The uniqueness of this momentum collapse is its occurrence against a backdrop of generally positive corporate fundamentals and macro data. U.S. banking earnings reports this week presented a "clear and positive interpretation" of the economic situation, with corporate loans increasing by 17% year-on-year, setting a historical record and covering all sectors of the economy. U.S. consumer spending tracking growth is in the mid-single digits, with credit card spending increasing by 6%. Investment banking-related business lines grew by over 40%, and large banks’ tangible equity return reached 19%, a new high since the financial crisis. This divergence between strong fundamentals and weak market prices forms the core contradiction in the current landscape.

In the technology capital expenditure space, fundamentals also appear robust. TSMC raised its revenue growth guidance for 2026 to over 40%, based on over $150 billion in revenue. ASML’s earnings report triggered market expectations for a 15% to 30% upward revision in its earnings per share over the next one to three years.

However, both companies’ stock prices fell after the earnings announcements, exhibiting a typical "buy the rumor, sell the news" pattern. In contrast, IBM’s stock price hit its largest single-day drop in over 20 years due to delays in large contracts and disappointing consulting business performance, highlighting that even strong guidance cannot shield stocks from the broader momentum unwind.

Mark Wilson emphasized that this round of selling "is difficult to find clear signals at the fundamental level," reflecting instead structural factors such as positions, leverage, crowding, and concentration. The market is reacting to the mechanics of trade unwinding rather than new negative information. This structural perspective suggests that the pain is driven by the necessity to reduce exposure in crowded trades, rather than a reassessment of long-term value propositions. The lack of fundamental deterioration implies that once the positioning pressure is relieved, the market may stabilize more quickly than a fundamental-driven crash would allow.

Looking ahead, Wilson stated that he tends to believe the unwinding process of the momentum factor is nearing its end, but he pointed out that there is a lack of immediate catalysts for a market reversal in the short term. He indicated that as efficiency and business implementation capabilities improve, new leading directions in the market will gradually emerge, and market breadth will expand accordingly. An example of this broadening is the Dow Jones Transportation Index breaking new highs again this week.

However, he warned that the second derivative of earnings growth (i.e., the slowdown in growth) will become increasingly important after the market digests the second-quarter earnings and enters summer. Current valuation indicators show that tech sector valuations remain relatively high, posing a risk if growth rates decelerate.

Additionally, traditional asset classes and the correlations within assets are experiencing abnormal breaks, complicating risk management. For instance, the three-month correlation between gold and oil has dropped to extreme inverse levels in 35 years of history. This breakdown in historical relationships further increases the difficulty of portfolio construction and hedging strategies. As the market navigates this period of structural dislocation, investors must contend with the reality that traditional diversification benefits may be temporarily impaired, requiring a more nuanced approach to risk management in the coming months.