AI trading stalls! Goldman Sachs warns of the biggest divergence in momentum trading in five years, with funds shifting from chips to software.

Artificial intelligence-related trading is facing its most severe structural test since the start of this bull market. Goldman Sachs warns that an unprecedented split is occurring within momentum factors—the divergence between short-term and long-term momentum has widened to its largest in five years, and the largest drawdown in the AI sector since the launch of ChatGPT is reshaping the underlying logic of momentum trading.

In his latest client report on September 15, Goldman Sachs strategist Guillaume Soria pointed out that the 3-month momentum index (GSPRHMO3) rose 5% that day, while the 12-month momentum index (GSPRHIMO) fell 6.7%, marking the largest single-day performance gap in five years. Meanwhile, the Goldman Sachs index (GSPUARTI), which tracks AI-related stocks, has fallen nearly 45% from its peak, marking the largest drop since the inception of ChatGPT.

Goldman Sachs explicitly recommends that portfolios with AI exposure can be hedged by purchasing put options on the Mid-Term Winners Basket (GSXUHMOM) or the AI Beneficiary Stocks Basket (GSTMTAIP). The high degree of overlap between AI trading and momentum strategies is becoming a key hedging focus for them.

Momentum factor internal fission: Short-term and long-term performance diverge, reaching a five-year extreme.

The internal structure of momentum trading is changing rapidly. Goldman Sachs data shows that the daily performance gap between 3-month momentum and 12-month momentum has widened to its largest in five years, indicating that funds are clearly deviating from the previously dominant "old momentum leaders".

In terms of positioning, the overall exposure to momentum factors has also decreased. Measured over a one-year period, the current position is at the 41st percentile, a significant drop from before; however, when viewed over a five-year period, the position remains at a high level at the 88th percentile, indicating that systemic deleveraging has not yet been fully realized.

Meanwhile, the volatility of momentum factors was significantly higher than that of the broader market. Looking at the day's performance, the S&P 500 index fell by less than 30 basis points, but momentum factors showed significant divergence. This low correlation and high volatility makes the cost-effectiveness of momentum factors more attractive in the short term.

Funds flow from semiconductors to software: The "most disliked" sector at the beginning of the year makes a strong comeback.

The sector composition of momentum trading is also undergoing a clear rotation. A Goldman Sachs report shows that short-term momentum funds are flowing from semiconductors to software, which happened to be one of the least favored sectors at the beginning of the year.

This shift is already reflected in relative performance: Goldman Sachs' Software to Semiconductor Relative Performance Index (GSPUSOSE) recorded its second-largest single-day gain in history that day. Goldman Sachs believes that if this trend continues, fund flows may gradually transmit to the 6-month and even 12-month momentum basket, driving a future rebalancing of the momentum basket, manifested as buying software—including long position increases and short covering—while selling semiconductors.

It's worth noting that software had previously held the largest weighting position on the bearish side of the 12-month momentum index for an extended period. The rapid rebound in software not only signifies a shift in industry style but will also further exacerbate the divergence between short-term and long-term momentum.

The strong correlation between AI and momentum is at risk of collapse.

Although the AI sector and momentum factors still maintain a very high correlation, with the correlation coefficient remaining between 90% and 96% over a period of 1 month to 1 year, Goldman Sachs warns that this long-term, highly correlated relationship is facing loosening.

Goldman Sachs believes that the continued weakness in the AI sector will have a profound impact on the composition of momentum factors. As software gradually replaces semiconductors as a key driver of short-term momentum, the previously highly correlated trend between momentum and AI may gradually decouple.

Currently, the theme with the highest momentum exposure in the US market remains AI-related. However, if the rotation between software and semiconductors continues, the industry composition of the momentum basket will be further adjusted. For investors, this means that strategies that have previously used AI as a proxy for momentum exposure need to be re-evaluated, and momentum trading is entering a new phase of risk and reward.

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