Is the tech stock sell-off with the fastest decline rate and the largest drop in history drawing to a close? Goldman Sachs' reflection on the "cruel rotation" of the market

The tech momentum trade is undergoing its most dramatic unwinding in history.

In just 17 trading days, the U.S. stock tech momentum factor (TMT MoMo) has plummeted 40% from its peak, marking the fastest and deepest pullback on record, with the impact spreading across semiconductors, hedge funds, and the credit market.

Mark Wilson, Goldman Sachs Partner and Head of EMEA Hedge Fund Business, conducted a systematic review of this "brutal rotation" this week, noting that this round of selling is historically rare in both speed and depth, but its roots lie more in non-fundamental factors such as crowded positions and concentrated leverage, rather than a substantial deterioration in the economy or corporate earnings. He stated, The unwinding of the momentum factor is "nearing its end," but there are no immediate catalysts for a reversal in the short term.

Notably, this momentum collapse is taking place against a backdrop of generally sound macro and corporate fundamentals — U.S. banks reported a 17% year-on-year increase in corporate loans, TSMC raised its 2026 revenue growth guidance to over 40%, and inflation data came in moderately below expectations. This divergence between fundamentals and market price action is the core contradiction in the current market.

01

The Tech Momentum Factor Suffers Its Worst Sell-Off in History, With Pullback Speed and Depth Exceeding Historical Medians

According to data from Morgan Stanley's Quantitative and Derivatives Strategy Team (MS QDS), this round of momentum factor pullback has lasted 17 trading days, with a peak-to-trough decline of 28%. In comparison, the median historical pullback of the momentum factor since 1999 is 22%, lasting an average of 33 trading days.

This means that the current decline has surpassed historical median levels in both speed and depth, making it the most severe pullback since the 29% retracement between December 2022 and February 2023.

The situation in the tech sector is even more extreme. The TMT momentum factor (TMT MoMo) has fallen 40% from its peak, and according to MS QDS data, this is the fastest and deepest sell-off of the tech momentum factor in history.

Looking at various sub-sectors, the KOSPI has dropped 27% from its peak, U.S. AI tech beneficiary stocks are down 25%, global memory chip stocks have fallen 36%, and European semiconductors are down 23%. Among them, memory chip stocks account for roughly two-thirds of the total decline, while broader AI beneficiary stocks are about 24% below their highs.

02

Apparent Low Volatility Hides Underlying High Intensity, Market Risk Structure Is Unwinding

Price declines are only the surface of this turmoil, and the changes in the internal risk structure of the market are equally notable.

According to data from Goldman Sachs' volatility trading desk, The volatility of the Goldman Sachs High Beta Momentum Portfolio (GSPRHIMO) is currently approximately 10 times that of the S&P 500 Index volatility. Over the past 20 years of historical backtesting, such a significant volatility ratio has only been seen during the 2020 November pandemic shock.

At the same time, The gap between single-stock volatility and index volatility has expanded to an extreme historical level. Goldman Sachs data shows that the 3-month implied average correlation of S&P 500 constituents fell to a historical low of 0.14 this week, keeping S&P 500 index volatility low, while the average implied volatility of individual stocks reached 40%, 2.8 times the index's implied volatility, also setting a new historical record.

03

Positions Remain Crowded, Risks Have Not Been Fully Cleared

Despite the historically large pullback of the momentum factor recently, hedge funds' net exposure to it remains high from a long-term perspective. JPMorgan data shows that The combination of current position levels and the magnitude of the pullback continues to make the momentum factor one of the most critical core risks to watch in the market.

Meanwhile, the Goldman Sachs High Beta Momentum Factor has fallen 33% from its June high, with its year-to-date gain plummeting from 60% to just 12%, a trend that Mark Wilson has also noted.

He cited signs of deleveraging in the South Korean market as supporting evidence: reports indicate that Roughly 1 in every 30 South Korean adults had their stock margin accounts forcefully liquidated this week, showing that the deleveraging process has unfolded to a significant extent.

04

Fundamentals Are Sound, Risks Lie in Positions and Structure

The unique aspect of this momentum collapse is that it is occurring against a backdrop of generally improving corporate fundamentals and macroeconomic data.

Mark Wilson pointed out that U.S. banks' earnings reports this week present an "unequivocally positive reading" of economic conditions: corporate loans grew 17% year-on-year, a record high, covering all sectors of the economy; U.S. consumer spending tracking shows mid-single-digit growth, with credit card spending up 6%; investment banking-related business lines collectively increased by more than 40%; large banks' tangible return on equity reached 19%, a post-financial crisis high.

In terms of tech capital expenditure, TSMC raised its 2026 revenue growth guidance to over 40% (based on a revenue base of more than $150 billion), and ASML's earnings report sparked market expectations of 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 releasing their results, showing a typical "sell-the-news" pattern. In contrast, IBM saw its stock price post its largest single-day drop in over 20 years due to large contract delays and underperforming consulting business.

Mark Wilson emphasized that This round of selling "finds little clear signal on the fundamental side," and more reflects structural factors such as positions, leverage, crowding, and concentration.

05

The Rotation Is Nearing Its End, But Reversal Catalysts Are Yet to Emerge

Mark Wilson stated that He is inclined to believe that the unwinding of the momentum factor is nearing its end, but also noted that there is a lack of summer catalysts that can immediately drive a market reversal in the short term.

He also reminded that as efficiency and commercial implementation capabilities improve, new leading directions for the market will gradually emerge, and market breadth will expand accordingly — the Dow Jones Transportation Index breaking through new highs again this week is one such example.

However, he also warned that The second derivative of earnings growth (i.e., the slowdown in growth) will become increasingly important as the market digests Q2 earnings and moves into summer, and current various valuation metrics show that the tech sector's valuations remain high.

In addition, correlations within traditional asset classes and across assets are experiencing abnormal breakdowns. For example, the 3-month correlation between gold and crude oil has dropped to an extremely inverse level in 35 years of history, further increasing the difficulty of risk management and portfolio construction.

This article is from the WeChat public account "Wall Street CN", written by Li Jia, and published by 36Kr with authorization.