High-beta momentum stocks in the US market are experiencing the most intense sell-off of the current cycle, yet the market has not descended into a state of panic-driven stampede.
Goldman Sachs' trading desk characterized the July 7th trading session as an 'ugly day' in its latest review. Triggered by Samsung's revenue slightly missing buyer expectations and news of DeepSeek's in-house AI chip development, the global AI sector faced a cascading sell-off. The high-beta momentum factor (GSPRHIMO) plunged approximately 6% in a single day, with a cumulative five-day drop exceeding 20%, surpassing Goldman's prior expectations for a 'brief summer pullback'.
Goldman Sachs trader Guillaume Soria noted that the speed and magnitude of this sell-off are unprecedented since the market rotation from the 'stay-at-home' to 'reopening' narrative in 2020 during the COVID-19 pandemic. However, that earlier episode had a stronger fundamental catalyst, whereas the current one lacks a driver of comparable force.
Despite the ferocity of the selling, the Goldman trading desk explicitly stated it has 'not yet seen panic mode on the desk'. The current de-risking activity remains orderly, primarily driven by systematic/factor flows rather than panicked liquidation. Simultaneously, retail investors have emerged as the market's most crucial support—shifting to net buying during the session, with net inflow volume at the close ranking in the 90th percentile over the past three years.
It is noteworthy that data from UBS's cash trading desk similarly indicates that excess selling flows remain moderate and do not constitute a panic signal, but it warns that if the selling persists, the situation could shift from orderly to panic liquidation.
AI Sector Faces Cascading Impact, Momentum Factor Down Over 20% in 5 Days
The trigger for this sell-off originated in the global AI supply chain.
On July 7th, Samsung released preliminary earnings, which, while posting a record operating profit, showed revenue slightly below buyer expectations, leading to a 9% single-day drop in its share price in the Korean market. Concurrently, DeepSeek's announcement of plans to develop its own AI chips further heightened market concerns about the AI hardware landscape, sparking an overspill sell-off across the global AI complex.
Trading volume surged sharply in semiconductor and leveraged ETFs. According to Goldman data, SOXL volume was 35% above its 30-day average, with the product now down 50% from its all-time high just 10 trading days prior; DRAM-related volume was 60% above average; and SMH volume was 30% above average.
Goldman Sachs TMT specialist Peter Bartlett pointed out that while the fundamental view on the tech sector remains generally positive, especially among professional tech investors, buying and defensive positioning in recent weeks has clearly become more 'selective', a noticeable cooling compared to the frenzied buying pace seen in May and early June.
The Goldman trading desk noted that SK Hynix's guidance raise and META's cloud business developments were considered triggers, but the 'fundamental view remains positive', which is one key reason the situation has not yet escalated into panic.
Orderly De-risking, Not Panic Selling, But Risks Linger
Despite the severe market sell-off, data from both Goldman and UBS trading desks point to the same conclusion: the core of the current selling is de-leveraging, not the initiation of new short positions.
The UBS cash trading desk observed that selling pressure is primarily from long-only accounts, while hedge funds are mainly engaged in tactical operations—primarily covering shorts and selectively adding to positions. This aligns with the assessment of a 'de-leveraging driven' rather than a 'bearish conviction driven' move.
However, underlying risks should not be ignored. From a technical perspective, the high-beta momentum (GSPRHIMO) and broad AI index (GSTMTAIP) have not yet entered oversold territory despite the current declines and remain up a significant 23% year-to-date. Furthermore, from a five-year perspective, related positioning remains extremely crowded.
The Goldman trading desk stated plainly that in the absence of positive catalysts, there is room for further selling ahead.
Additionally, July is historically one of the worst-performing months for the momentum factor, and this month is on track to be the worst July on record for high-beta momentum. Goldman's historical data shows the factor's maximum historical drawdown is roughly double the current decline, implying that if market leadership rotates, the magnitude of this drop could still expand significantly.
As institutional investors broadly retreat, the counter-trend buying by retail investors has become the most notable structural feature of this market episode. Goldman data shows retail investors shifted to net buying during the session and continued to add, with net inflow volume at the close reaching the 90th percentile over a three-year lookback, making them one of the most important supportive forces in the market that day.
Simultaneously, the market's internal structure has not completely broken down. Two hundred eighty-three S&P 500 constituents closed higher on the day, showing some breadth support, which aligns with the 'ongoing market broadening' theme previously highlighted by Morgan Stanley strategist Michael Wilson.
Facing the current situation, Goldman trader Guillaume Soria has adopted a more cautious stance, believing it is a stretch to characterize a 20% five-day drop as a 'healthy correction'. However, he noted that following a robust 57% performance in the first half of the year, the extreme positioning in the momentum factor has been somewhat reset—falling from a historic high one month ago to the 60th percentile on a one-year lookback, with overall performance still strong.
Soria believes the market may be in the 'later stages' of this adjustment, but if negative news widens cracks into chasms and market leadership rotates, it could evolve into a deeper correction.
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