Source: Wall Street Insights
Tech momentum trading is experiencing its most severe unwinding in history. In just 17 trading days, the U.S. stock technology momentum factor (TMT MoMo) has plunged 40% from its peak, setting a record for the fastest and deepest drawdown on record, with contagion spreading comprehensively from semiconductors to hedge funds and credit markets.
Mark Wilson, partner and head of EMEA hedge fund business at Goldman Sachs, provided a systematic review of this "brutal rotation" this week. He noted that this sell-off is historically rare in both speed and depth, but its root cause stems more from non-fundamental factors such as crowded positioning and concentrated leverage, rather than a substantial deterioration in the economy or corporate earnings. He stated that the unwinding process for the momentum factor is "nearing its end," but lacks an immediate catalyst for reversal in the short term.
It is noteworthy that this momentum breakdown occurred against a backdrop of overall robust macro and corporate fundamentals—U.S. banks reported a 17% year-on-year increase in corporate lending, TSMC raised its 2026 revenue growth guidance to over 40%, and inflation data also came in moderately below expectations. This divergence between fundamentals and market price action is the core contradiction in the current market.
Tech Momentum Factor Suffers Historic Sell-off, Drawdown Speed and Depth Exceed Historical Median
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 comparison, the median momentum factor drawdown since 1999 has been 22%, lasting an average of 33 trading days.
This means the current decline has exceeded the historical median in both speed and depth, marking the most severe episode since the 29% drawdown from December 2022 to February 2023.
The situation is even more extreme in the tech sector. The TMT momentum factor (TMT MoMo) has fallen 40% from its peak. According to MS QDS data, this represents the fastest and deepest sell-off ever for the tech momentum factor.
Looking across various subsectors, South Korea's Kospi index is down 27% from its peak, U.S. AI tech beneficiaries are down 25%, global memory chip stocks are down 36%, and European semiconductors are down 23%. Among these, memory chip stocks account for about two-thirds of the overall decline, while the broader AI beneficiaries are down about 24% from their highs.
Low Surface Volatility Masks High Internal Intensity, Market Risk Structure is Unraveling
Price declines are only the surface manifestation of this turmoil; changes in the market's internal risk structure are equally noteworthy.
According to Goldman Sachs' volatility trading desk data, the current volatility of Goldman Sachs' High Beta Momentum portfolio (GSPRHIMO) is approximately 10 times that of the S&P 500's volatility. In the historical backtest over the past 20 years, such a stark volatility ratio has only been comparable to the situation during the pandemic shock in November 2020.
Simultaneously, the gap between single-stock volatility and index volatility has widened to historical extremes. Goldman Sachs data shows that the three-month average implied correlation among S&P 500 constituents fell to a record low of 0.14 this week, causing the S&P 500 index volatility to remain low, 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.
Positions Remain Crowded, Risks Not Yet Cleared
Despite the recent historic drawdown in the momentum factor, hedge funds' net exposure to it remains high from a long-term perspective. J.P. Morgan data indicates that the combination of current positioning levels and the magnitude of the drawdown continues to make the momentum factor one of the core risks most deserving of caution in the market.
Meanwhile, the Goldman Sachs High Beta Momentum factor has fallen 33% since its June high, with its year-to-date gain plummeting from 60% to just 12%, a development also noted by Mark Wilson.
He cited signs of deleveraging in the Korean market as evidence: reports indicate that approximately one in every 30 South Korean adults had their stock margin accounts forcibly liquidated this week, showing that the deleveraging process has unfolded to a considerable extent.
Fundamentals Remain Sound, Risks Lie in Positioning and Structure
The peculiar aspect of this momentum breakdown is that it occurred against a backdrop of generally positive corporate fundamentals and macroeconomic data.
Mark Wilson pointed out that U.S. bank earnings this week presented an "unmistakably positive reading" of economic conditions: corporate lending grew 17% year-on-year, a record high, covering all economic sectors; U.S. consumer spending tracker growth is in the mid-single digits, with credit card spending up 6%; investment banking-related business lines collectively grew over 40%; large banks' tangible common equity return reached 19%, a post-financial crisis high.
On the tech capital expenditure front, 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 a 15% to 30% upward revision in its EPS 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's stock price suffered its largest single-day drop in over 20 years due to large contract delays and underperformance in its consulting business.
Mark Wilson emphasized that this sell-off is "difficult to pinpoint to a clear signal at the fundamental level," reflecting more the influence of structural factors such as positioning, leverage, crowding, and concentration.
Rotation Nearing End, But Reversal Catalyst Still Awaited
Mark Wilson stated that he is inclined to believe the unwinding process for the momentum factor is nearing its end, but he also noted that there is 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—the Dow Jones Transportation Average breaking to new highs again this week serves as one example.
However, he also warned that the second derivative of earnings growth (i.e., the slowdown in the growth rate) will become increasingly important as the market digests Q2 earnings and enters the summer, while current valuation metrics across the board indicate that tech sector valuations remain elevated.
Furthermore, abnormal breakdowns in correlations are occurring both between traditional asset classes and within them; for example, the three-month correlation between gold and crude oil has fallen to an extreme inverse level in its 35-year history, further increasing the difficulty of risk management and portfolio construction.
