Momentum unwinding accelerates as market shifts from FOMO to FUD

Original author: Dong Jing

Source: Wall Street Journal

Beneath the surface calm of global equity markets, a historic breakdown of momentum strategies is accelerating. Goldman Sachs trader Benny Quek warns that positions in AI and technology sectors are far from being unwound, and volatility will persist into the third quarter.

The momentum factor has declined for five consecutive weeks, and leveraged ETFs have suffered a historic collapse, causing market sentiment to shift rapidly from "fear of missing out" to "fear of holding." Meanwhile, the core contradiction in the AI narrative has shifted from capital expenditures to profitability and return on investment, as credit spreads for hyperscale cloud providers have widened sharply, putting pressure on the market.

Multiple pressures are simultaneously building—geopolitical conflicts, oil price volatility, interest rate trends, and resurging tariff risks—are all vying to dominate market pricing. Goldman Sachs’ risk appetite indicator remains elevated, while the implied correlation among S&P 500 components is extremely low; this combination provides structural support for long positions in equity volatility.

The collapse of the momentum factor is the most prominent structural feature of the current market.

According to Goldman Sachs trader Benny Quek in his latest "Weekend Thoughts" report, the unwinding of momentum strategies has now continued for five consecutive weeks, accompanied by a historic collapse in leveraged ETFs.

Using the Korean market as an example, the size of leveraged ETFs has halved from a peak of $53 billion to approximately half that amount, and the proportion of leveraged exposure to the market's free-float market cap has declined from a peak of 3.3% to 2.1%.

The daily rebalancing flows from Samsung and SK Hynix have dropped significantly from 40% and 26% to 15% and 14%, respectively, of the average daily volume over the past month. The KOSPI has now declined for five consecutive weeks, creating an unsettling parallel with the performance of China’s CSI 1000 between 2014 and 2015.

The U.S. market also faced pressure. The high vs. low momentum stock hedge portfolio dropped 8% in a single day last Friday, and although it still posted a 4% gain for the week, the extreme volatility clearly revealed the fragility of these positions.

The logic behind AI trading is undergoing a fundamental shift.

Quek noted that market focus has shifted from headlines about capital expenditures by hyperscale cloud providers to more challenging core issues: profit margins, return on investment, and the continuously rising scale of debt issuance.

Goldman Sachs estimates that AI-related bond supply year-to-date has reached $489 billion, with 40% coming from hyperscale cloud providers—equivalent to 1.5 times the full-year 2025 forecast. Meanwhile, credit spreads for hyperscale cloud providers are widening sharply, making the pressure to raise debt financing costs unavoidable.

From a market capitalization perspective, the S&P 500 has increased its market cap by $31 trillion since December 2022, while Goldman Sachs estimates the potential value of AI at $9 trillion, $8 trillion, and $28 trillion under baseline, optimistic, and blue-sky scenarios, respectively. This comparison suggests that the current expansion in market capitalization has already largely priced in the potential upside of AI.

Quek clearly stated that he believes positions in AI, technology, and momentum strategies are far from reaching the "clean" state expected by the market, and remains highly vigilant about continued high volatility in the third quarter.

He tends to adopt a "dumbbell" strategy in response to the current environment, allocating both defensive assets and selected offensive positions to navigate uncertain, range-bound market conditions.

From a technical indicators perspective, although volatility at the individual stock and factor levels has surged significantly, the implied correlation among S&P 500 components remains at extremely low levels. Quek notes that this divergence provides an additional structural rationale for going long index volatility—low correlation implies that index-level volatility is underestimated, and any rebound in correlation would amplify index-wide moves.

Goldman Sachs' risk appetite indicator remains elevated, suggesting that overall market sentiment has not yet fully priced in the aforementioned risks, further supporting a cautious outlook on volatility.

Despite an overall pressured environment, signs of capital rotation are clearly evident in Asian markets. The Jakarta Composite Index (JCI) has rebounded 16% from its low, while India recorded the region’s strongest monthly foreign inflows, as capital shifts from high-momentum, high-valuation sectors toward more defensive and value-oriented assets.

From a sector perspective, the rotation trend is clearer. The relative price of the software sector compared to semiconductors has broken above the 50-day moving average, indicating that internal market rebalancing is still underway.

Additionally, notable signals are emerging in the gold market: CFTC gold futures positioning is rising, a metric that has historically led spot gold prices; at the same time, China’s gold imports in June reached a two-year high, underscoring不容忽视的潜在支撑.

Quek also expects increased headline-driven market volatility as the U.S. midterm elections approach.

Historical data shows that U.S. stock markets typically consolidate ahead of midterm elections and tend to strengthen after the election. This pattern may offer a temporary time anchor for today’s pressured market, but how much longer the momentum sell-off will persist remains the market’s biggest unanswered question.

Global stock markets ended last week largely flat, but this figure masks significant internal volatility. Markets had previously ignored persistent geopolitical tensions, oil price movements, and interest rate changes—but these three forces have now simultaneously entered the spotlight, vying for pricing control.

Meanwhile, the tariff issue has reignited, adding further uncertainty to an already fragile market sentiment. Quek noted that this year’s volatility has been extremely draining for investors, and the market is now in a complex phase where multiple narratives intersect, making direction difficult to discern.