At the end of July, AI momentum stocks experienced extreme volatility; the size of South Korea’s semiconductor ETF shrank from $53 billion to $15 billion, and Goldman Sachs’ high-beta momentum basket posted its worst performance since November 2000. Value, quality, and low-volatility factors rebounded significantly, while the equal-weight S&P 500 index hit a new all-time high this week. The semiconductor sector recorded its largest two-day gain since June, and the KOSPI index surged as much as 18.5%. Markets are assessing whether the momentum rotation has reached its bottom. The hedge fund Situational Awareness faced forced deleveraging due to leveraged AI positions, which only halted after Citadel stepped in to absorb the declining stock portfolio. Analysts note that over $1 trillion in AI capital expenditures is currently flowing into the system, with fundamentals remaining solid, but advise monitoring risks associated with long-duration interest rates.Article author and source: Wall Street Journal
As the month comes to a close, Wall Street has seen a collective rebound, but the market remains far from consensus on whether this rally is merely a technical correction after overselling or a true signal that AI investment fundamentals have hit bottom.
In the last two trading days of July, high-momentum stocks that had previously suffered heavy losses posted a strong two-day rebound, with South Korea’s chip-heavy KOSPI index surging over 18% in a single day, while the U.S. semiconductor sector recorded its largest two-day gain since June.
However, in July, the Nasdaq Composite Index fell approximately 3%, marking its worst monthly performance since March and recording consecutive monthly declines. The Goldman Sachs High Beta Momentum Basket posted its worst single-month decline since November 2000 in July.
The immediate trigger for this turmoil was the leveraged AI betting failure.
Wall Street Journal reported that the hedge fund Situational Awareness (SA), managed by Leopold Aschenbrenner, faced a margin call due to a leveraged AI position liquidation, forcing it to sell publicly traded equity assets in a declining market.
The market's downward spiral was only halted when Citadel, one of the world’s largest hedge funds, stepped in to take over most of its stock portfolio. However, to many market participants, this event revealed far more than just the risk of a single fund’s positions.
SA Liquidation Storm and Forced Deleveraging
At the heart of this storm is the hedge fund Situational Awareness, led by Leopold Aschenbrenner.
Wall Street Journal reported that the fund suffered significant losses on its AI-related leveraged positions, triggering a margin call and forcing it to sell publicly traded stocks amid a market downturn, further accelerating the decline.
The scale and speed of deleveraging are evidenced across multiple dimensions:
- Global tech stocks experienced their largest sell-off in over five years;
- As of July 30, the assets under management (AUM) of leveraged and inverse ETFs listed in the United States hovered just below $150 billion, a decline of nearly $60 billion from the June high.
- The assets under management for South Korean stock leveraged ETFs dropped sharply from a June peak of $53 billion to approximately $15 billion;
- Multiple quantitative factors experienced their largest single-day fluctuations over four years.
The downward spiral was only halted when Citadel stepped in to take over the majority of its public market stock portfolio. However, S.A. hedge fund was not an isolated black swan event.
Previously, the AI sector had already begun to weaken as investors questioned the return on AI investments, and a normally uneventful Fed interest rate meeting further fueled market doubts about the new chair's resolve to curb inflation, pushing up long-term U.S. Treasury yields.
The one-week expansion in the slope of the 5- to 30-year yield curve was the largest since August 2025.
According to Yin Luo, quantitative analyst at Wolfe Research, the rise in long-term yields reflects not only strong economic conditions but also higher inflation expectations and an elevated term premium—the additional return investors demand for holding long-term Treasuries rather than rolling over short-term bonds.
July saw the collapse of the momentum factor—a historic style rotation.
From the perspective of quantitative factors, the intensity of this market movement is particularly notable.
The momentum strategy, which involves betting on recent outperforming stocks, experienced its largest four-day decline since 2020, followed by its largest single-day rebound over the same period.
This week, the S&P 500 averaged less than 1% daily volatility, while Goldman Sachs’ flagship momentum index averaged nearly 10% daily volatility. Some analysts believe that a significant rebound in the stock market is unlikely before this signal weakens.
Looking back at the entire month of July, the monthly performance of the Goldman Sachs High Beta Momentum Basket was the worst since November 2000. Long positions within the basket generally came under pressure, while several software stocks previously shorted rose against the trend.
Meanwhile, factors that have long underperformed—such as value, quality, and low volatility—have shown a significant rebound, preliminarily reversing the style ranking since the rise of AI-driven markets.
The S&P 500 Equal Weight Index, the S&P 500 Low Volatility Index, and the S&P 500 Index excluding AI-related components all reached new all-time highs this week.
Wai Lee, Head of Systematic Equity Research at Allspring Global Investments, said:
The recent weakening of momentum appears more like a rotation rather than a crash or correction. The market is rewarding stocks that demonstrate better investment returns and free cash flow.Has the market reached a turning point?
This weekend's rebound has provided the market with some breathing room.
Semiconductor stocks posted their largest two-day gain since June, with the KOSPI index, which has a high weighting of Korean chips, surging as much as 18.5%. The S&P 500 reclaimed its 50-day moving average, and the VIX volatility index fell from above 20 earlier this week to 15.99.
However, Michael Dickson, Research Director at Horizon Investments, raised a more cautious question:
The real question is: Have we reached the bottom of momentum rotation?Lewis Grant, Senior Portfolio Manager at Federated Hermes, believes that "the most intense phase of rotation has likely passed" after a significant pullback in momentum stocks and a partial recovery in the valuations of AI leaders.
Mike Shell, Chief Investment Officer of Shell Capital, said that data from its brokers suggests the momentum unwind is nearing its conclusion and the risk-reward profile is becoming more attractive; however, he emphasized that this does not mean the exact bottom has been confirmed.
JPMorgan’s quantitative team holds a more cautious stance. In a report on Friday, the strategy team led by Khuram Chaudhry wrote that deteriorating sentiment and the peak in money supply growth suggest the rotation may continue, noting that “this month feels different,” and recommending an overweight position in quality factors.
Paisley Nardini, Head of Simplify Asset Management, offered a broader warning: July demonstrated that "simply buying the index" is no longer sufficient in today’s market environment—the value of active management is reemerging.
Seasonal factors are also a variable. Historically, August and September have been the two weakest months of the year, and a key question the market is asking is whether this year’s typical late-summer volatility has already been priced in.
Pasquariello of Goldman Sachs provided a relatively optimistic overall assessment in his weekly report: the economy is performing steadily, earnings growth remains strong, capital flows are improving, and over $1 trillion in AI capital expenditures is flowing into the system.
The report states:
The fundamental foundation of the market remains solid, and the overall outlook for U.S. stocks is still favorable.But he also explicitly highlighted tail risks, particularly noting that the movement of long-term interest rates in the global bond market warrants close attention, "especially for long-duration stocks."
He believes that the S&P 500 will continue to face pressure, but near-term volatility will increase, and the summer liquidity environment will make risk shifts more difficult.
He advised investors to maintain a portfolio preference for "increasing liquidity and reducing complexity" over the coming weeks.