Momentum stocks plunge! Goldman Sachs traders: The "hottest stocks" in the US market face the "biggest sell-off"

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Since the beginning of this year, the momentum stocks that have led the US stock market rally are undergoing a dramatic sell-off.

According to a report sent to clients by Goldman Sachs top trader Guillaume Soria after Wednesday's close, although the S&P 500 ended largely flat on the day, there were hidden undercurrents in the market’s internal structure. The market is experiencing a "forceful unwinding" of recent mainstream investment themes, with momentum stocks that have performed well in the recent past broadly sold off.

This sell-off has had a particularly significant impact on the most speculative sectors, including heavily shorted stocks, quantum computing concept stocks, and unprofitable tech companies. The report warns that given the seasonally weak pattern of the momentum factor from November to January, and the current still-crowded positions, this downturn may not be over yet.

The Fade of Momentum Trading, with Funds Flowing to "Quality Stocks"

Goldman Sachs traders clearly point out that a significant rotation is happening in the market. Momentum stock portfolios based on performance over the past 3 months, 6 months, or 12 months have all seen obvious capital outflows.

Guillaume Soria emphasizes in the report that the core themes driving the current market narrative are being dismantled.

Data shows that speculative assets with the largest prior gains are now leading the market lower, while the "quality stocks" factor representing solid fundamentals is regaining investor favor. This suggests that amid rising market uncertainty, investors are shifting from chasing high growth to seeking fundamental certainty, with a clear change in risk appetite.

Seasonal Headwinds and High Positioning Intensify Sell-off Risk

The selling pressure on momentum stocks may have just begun. Guillaume Soria's analysis shows that, historically, November to January are the three worst months for momentum factor performance. These seasonal headwinds are particularly dangerous for momentum trades this year.

According to Goldman Sachs data, the momentum factor itself is up about 7% so far this year, while the Goldman-built momentum stock baskets are up between 15% and 35%. Their stellar performance was mainly driven by long positions. As investors lock in profits before the end of the year, these high-gain stocks are the most likely candidates for profit-taking.

Furthermore, main broker business data from Goldman Sachs shows hedge funds’ exposure to momentum stocks remains extremely high—at the 90th percentile over the past year and the 94th percentile over the past five years. Such crowded positioning means that once unwinding starts, it can easily trigger a stampede sell-off.

Momentum Stock Composition: Concentrated Exposure to High Beta and Tech Stocks

The composition of current momentum stocks also makes them especially vulnerable when the market turns. Guillaume Soria found that the current momentum factor is predominantly long on information technology and industrial sectors, while short on healthcare and consumer sectors. In terms of style, it is heavily tilted toward high-beta and high-volatility stocks, which have been the strong-performing assets since the April lows.

The report also mentions that, since "Tariff Liberation Day," momentum stocks and gold have exhibited highly similar trends, both experiencing steep declines in recent days. This correlation suggests that the macro factors driving both asset classes may be shifting.

The sharp decline in momentum stocks also reflects the issue of insufficient market breadth. Guillaume Soria points out that in 13 of the past 15 years, the S&P 500 has outperformed the "X7 Index", which excludes the seven major tech giants. Since January 1, 2020, the annualized performance gap between the two has reached 6%.

Accordingly, Guillaume Soria suggests that investors seeking tactical hedges may consider using the "X7 Index" to build a limited-loss hedging strategy. He believes this approach is more targeted and lower cost than directly hedging the S&P 500.

Risk Notification and DisclaimerThe market carries risks, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial circumstances, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment according to this article is at your own risk. ```