Goldman Sachs warns top clients: AI momentum trading shows unprecedented cracks, recommends hedging.

Goldman Sachs is warning its top sales and trading clients that the momentum structure supporting the strongest trading theme of the decade, AI, is showing deep cracks and is advising investors with related exposure to hedge.

According to a recent report to top clients by Goldman Sachs strategist Guillaume Soria, on September 15th, the 3-month momentum factor (GSPRHMO3) rose 5% in a single day, while the 12-month momentum factor (GSPRHIMO) fell 6.7% on the same day, marking the largest performance gap between the two in five years. Meanwhile, the Goldman Sachs AI Theme Basket (GSPUARTI) has fallen nearly 45% from its peak, representing the most severe pullback since the launch of ChatGPT. Goldman Sachs believes that if this trend continues, the momentum factor will begin to decouple from the AI theme.

Regarding market impact, Goldman Sachs explicitly stated that hedging the momentum factor "remains reasonable" in the short term, especially given that the momentum factor's volatility is significantly higher than that of the broader market index—the S&P 500 fell by less than 30 basis points that day, while the momentum factor experienced significant internal volatility. Goldman Sachs recommends that investors holding AI exposure hedge by purchasing put options on the Mid-Term Winners Basket (GSXUHMOM) or the AI Beneficiary Stocks Basket (GSTMTAIP). The indicative cost of a one-month put option on GSTMTAIP with a strike price of 95% of the current price is approximately 2.02%, and a term of 27 days.

A historic split occurs within the momentum factor.

The core warning in Goldman Sachs' report is that the divergence between short-term and long-term momentum has reached an unusually extreme level. The daily performance gap between 12-month and 3-month momentum is the largest in five years, indicating that the market is rapidly abandoning previous long-term winners and chasing new short-term leaders.

From the perspective of position, the concentration of momentum factor holdings has been digested to some extent—it is at the 41st percentile in the one-year retrospective period, which is significantly lower than before—but if the retrospective period is five years, the position is still at a high level of the 88th percentile, which means that the systemic destocking pressure has not been fully released.

Goldman Sachs points out that the correlation between the momentum factor and the AI theme remains extremely high, with the correlation coefficient remaining between 90% and 96% over different periods ranging from one month to one year. However, it is precisely this high degree of correlation that makes the continued decline in AI particularly significant in terms of the structural impact on the momentum factor.

Funds are flowing from semiconductors to software, reshaping the landscape.

Another significant change within the momentum factor is the reversal in sector rotation. Short-term momentum is withdrawing from the semiconductor sector and flowing into the software sector—which was one of the least favored sectors at the beginning of the year. Goldman Sachs data shows that the software-to-semiconductor performance index (GSPUSOSE) recorded its second-best single-day performance ever that day.

Goldman Sachs believes this rotation trend has spread from 3-month momentum to 6-month momentum, and if selling pressure continues, it is expected to further extend to 12-month momentum. Looking at the future rebalancing direction of the momentum basket, Goldman Sachs anticipates increased long positions and short covering in software, as well as reduced positions in semiconductors, which will structurally reshape the composition of the momentum factor.

It is worth noting that the software sector was previously the sector with the highest weighting in the 12-month momentum factor bearish leg, and its rebound itself is exacerbating the pressure on the long-term momentum factor.

Goldman Sachs recommends top clients initiate hedging.

The very scope of the audience for this warning sends a signal. It is understood that this Goldman Sachs report was not distributed to ordinary sell-side clients, but rather targeted at the bank's top sales and trading clients, giving it a much higher priority than regular research distribution channels.

Regarding specific operational recommendations, Goldman Sachs suggests that clients with AI exposure in their portfolios may consider hedging using put options on GSX UHMOM or GSTMTTAIP. Taking GSTMTTAIP as an example, a one-month put option with 95% strike price has an indicative cost of approximately 2.02% and a term of 27 days, making the hedging cost relatively controllable.

Goldman Sachs also emphasized that the current volatility of the momentum factor is significantly higher than that of the broader market index, and this divergence itself constitutes a reasonable basis for hedging. Given that the S&P 500 index fell by less than 30 basis points that day, the sharp fluctuations within the momentum factor highlight its current vulnerability.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.