The tech momentum trade is undergoing its most severe unwinding on record. Within a mere 17 trading days, the US tech momentum factor (TMT MoMo) has plunged 40% from its peak, marking the swiftest and deepest drawdown in history, with repercussions spreading across semiconductors, hedge funds, and credit markets.
This week, Mark Wilson, a Goldman Sachs partner and head of EMEA hedge fund business, provided a systematic review of this "brutal rotation." He noted that the scale and speed of this sell-off are historically rare but argued its roots lie more in crowded positioning and concentrated leverage rather than a fundamental deterioration in the economy or corporate earnings. He stated that the momentum factor unwinding is "approaching its end," though catalysts for an immediate reversal are lacking in the near term.
Significantly, this momentum collapse has occurred against a backdrop of overall robust macro and corporate fundamentals. US banks reported a 17% year-on-year increase in corporate lending, TSMC raised its 2026 revenue growth guidance to over 40%, and inflation data came in softer than expected. This divergence between fundamentals and market price action represents the core contradiction in the current market.
Tech Momentum Factor Hit by Historic Sell-Off, Drawdown Exceeds Historical Norms
According to data from Morgan Stanley's Quantitative and Derivatives Strategy team (MS QDS), this momentum factor drawdown has lasted 17 trading days, with a peak-to-trough decline of 28%. In contrast, the median momentum factor drawdown since 1999 has been 22%, typically unfolding over 33 trading days on average.
This indicates the current decline has surpassed historical median levels in both speed and depth, representing the most severe drawdown since the 29% drop 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, which, per MS QDS data, constitutes the fastest and deepest sell-off ever for the tech momentum factor.
Looking across sub-sectors, the Kospi index is down 27% from its peak, US AI beneficiary stocks are down 25%, global memory chip stocks have fallen 36%, and European semiconductors are down 23%. Memory chip stocks account for about two-thirds of the overall decline, while broader AI beneficiaries are down roughly 24% from their highs.
Low Surface Volatility Masks High Internal Intensity, Market Risk Structure Unraveling
Price declines are just the surface manifestation of this turmoil; the shifts in the market's internal risk structure are equally noteworthy.
Data from Goldman Sachs' volatility trading desk shows the volatility of the Goldman Sachs High Beta Momentum basket (GSPRHIMO) is currently about 10 times that of the S&P 500. Looking back over the past 20 years, such a stark volatility ratio has only been comparable to the period during the November 2020 pandemic shock.
Simultaneously, the gap between single-stock volatility and index volatility has widened to historical extremes. Goldman Sachs data indicates the three-month implied average correlation among S&P 500 constituents dropped this week to a record low of 0.14. This keeps S&P 500 index volatility subdued, while the average implied volatility for single stocks is as high as 40%—2.8 times that of the index's implied volatility—also setting a historical record.
Positioning Remains Crowded, Risk Not Yet Fully Cleared
Despite the momentum factor's recent historic drawdown, hedge funds' net exposure to it remains elevated on a long-term view. J.P. Morgan data suggests the current combination of positioning levels and the magnitude of the drawdown continues to flag the momentum factor as one of the most critical risks to watch in the market.
Concurrently, 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 point also noted by Mark Wilson.
He cited signs of deleveraging in the Korean market as supporting evidence: reports indicate that roughly 1 in 30 Korean adults had their stock margin accounts forcibly liquidated this week, suggesting the deleveraging process is already well underway.
Fundamentals Remain Sound; Risk Lies in Positioning and Structure
The peculiar aspect of this momentum collapse is its occurrence against a backdrop of generally positive corporate fundamentals and macro data.
Mark Wilson pointed out that earnings reports from US banks this week presented an "unmistakably positive read" on economic conditions: corporate lending grew 17% year-on-year, a record high, spanning all economic sectors; US consumer spending tracked at a mid-single-digit growth rate, with credit card spending up 6%; investment banking-related business lines collectively grew over 40%; and large banks' tangible common equity returns reached 19%, the highest since the financial crisis.
Regarding tech capital expenditure, TSMC raised its 2026 revenue growth guidance to over 40% (based on a revenue base exceeding $150 billion), while ASML's earnings report sparked market expectations for 15% to 30% upward revisions to its earnings per share over the next one to three years.
However, both companies' share prices fell following their earnings announcements, displaying a classic "sell the news" pattern. In contrast, IBM saw its shares post their largest single-day drop in over two decades due to delays in large contracts and underperformance in its consulting business.
Mark Wilson emphasized that this sell-off is "difficult to pinpoint a clear signal on the fundamentals," reflecting more on structural factors like positioning, leverage, crowding, and concentration.
Rotation Nears End, But Catalysts for Reversal Yet to Emerge
Mark Wilson stated he leans towards the view that the momentum factor unwinding process is nearing its end, but also noted a lack of immediate summer catalysts to drive a market reversal in the short term.
He also suggested that as efficiency and commercial viability improve, new market leadership will gradually emerge, and market breadth will expand accordingly—citing the Dow Jones Transportation Average breaking to new highs again this week as an example.
However, he cautioned that the second derivative of earnings growth (i.e., the rate of growth deceleration) will become increasingly important as the market digests Q2 earnings and moves into the summer, while current valuation metrics across the board indicate the tech sector remains expensive.
Furthermore, traditional correlations between asset classes and within asset classes are showing unusual breaks. For instance, the 3-month correlation between gold and crude oil has fallen to an extreme inverse level not seen in 35 years, further complicating risk management and portfolio construction.
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