Last Friday’s plunge was just a rehearsal? Goldman Sachs and Barclays both issue warnings: AI trading crowding has exploded.

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The extreme crowding of AI trading is pushing the stock market toward a fragile tipping point.

Last Friday, momentum stocks in the U.S. market suffered heavy losses. The iShares MSCI USA Momentum Factor ETF dropped 6% in a single day, marking the largest one-day decline since the April 2025 sell-off; the Nasdaq 100 plunged 4.8%, as investors rushed to sell large-cap tech stocks and moved into defensive assets. Trading teams at Goldman Sachs and Barclays immediately issued warnings, stating that this crash should not be seen as an isolated incident—market structural vulnerability has now risen significantly.

On Monday, U.S. stocks saw a slight rebound; the S&P 500 rose 0.3%, and the Nasdaq 100 climbed 1.6%. U.S. stock futures pointed to further gains before Tuesday's trading.

However, several institutions remain cautious about the sustainability of the rebound. Wall Street Insights mentioned earlier that Mark Newton, Head of Technical Strategy at U.S. independent research firm Fundstrat, said in a post-market report on Monday that the day’s rally looked more like a "dead cat bounce" rather than the formation of a trend bottom, and expects the market to remain weak at least until late July, with the downside risk possibly extending into October.

Momentum Trading Crowding Hits Historic Extremes, Risk of Reversal Surges

Goldman Sachs data show that the crowding at the long end of momentum trading strategies has reached the highest level in history, while the short end remains under-allocated.

This structural imbalance means that once uncertainty arises in the outlook for AI trading, the Fed’s rate path, or inflation rebound, the reversal could be much more violent than what index volatility suggests.

"All these factors together create an environment where the destructive power of factor unwinding could be much more severe than what index volatility presents," Goldman Sachs traders Lee Coppersmith and others wrote in a report to clients.

Systematic investors' positions are also a potential source of pressure. Commodity Trading Advisors (CTA) and volatility control strategies have increased their stock exposures to the highest levels since February. If price volatility persists, such funds will face forced reduction pressure.

Volatility-Control Funds Could Trigger a New Wave of De-Risking

Barclays Global Equities Tactical Strategy Head Alexander Altmann warns that last Friday’s crash may force volatility-control funds to reduce U.S. stock positions by about 14 percentage points, which would be the largest one-day de-risking since February 6.

Altmann noted that some de-risking activities may have already been completed last Friday, but such selling typically has a short-term lag effect, possibly exerting ongoing pressure on the market early this week. “When market moves become extreme, this mechanism can have a significant impact on short-term price action,” he stated.

Altmann described the current market landscape as an “abnormally asymmetric structure,” arguing momentum trading "faces much more severe unwinding risk once positions start to reverse."

J.P. Morgan Cuts Short-Term Rating, Warns Tech Stocks Still Face Selling Pressure

J.P. Morgan’s trading desk downgraded its recent U.S. equity rating from bullish to “tactically cautious” on Monday, warning that the market may continue to experience shocks in the short term, as investors may continue to reduce their positions in recently surging tech stocks.

Andrew Tyler, Head of Global Market Intelligence at J.P. Morgan, said, "We do believe buying on dips is possible," but emphasized that given the market faces multiple immediate correction risks, "building positions in batches over this week and next week is more reasonable."

He listed risk factors including: bond market volatility, position unwinding pressure, potential fading of AI trading, and continued expansion of equity issuance sizes.

AI Financing Boom Brings Supply Shock, Liquidity May Be Diverted

The market is also facing a new structural pressure: many companies seeking funding to support AI expansion plans are preparing to raise capital through concentrated IPOs, with the scale of stock supply being rare in recent history.

This flood of supply is arriving just as market positions are becoming increasingly extreme, causing some strategists to worry existing stock liquidity could be diverted—especially as high rates and slower economic growth make this pressure stand out even more.

Overall, the high crowding in AI trades, passive de-risking pressure from systematic funds, continued selling risk for tech stocks, and the impending supply shock of new equities together form an unfavorable short-term mix for the market. Last Friday’s plunge may just be the prologue to a larger adjustment.

Risk Warning and DisclaimerThe market carries risks; investment requires caution. This article does not constitute individual investment advice, nor does it consider the unique investment goals, financial circumstances, or needs of any particular user. Users should consider whether any opinions, views, or conclusions herein are suitable for their specific circumstances. Investing based on this content is at your own risk. ```