Is the Fastest and Deepest Tech Stock Sell-off in History Coming to an End?

Source: Wall Street Watch

The tech momentum trading is experiencing the most severe collapse in history. In just 17 trading days, the U.S. tech momentum factor (TMT MoMo) has dropped 40% from its peak, marking the fastest and deepest retracement on record, affecting a wide range from semiconductors to hedge funds and credit markets.

Mark Wilson, a partner at Goldman Sachs and head of EMEA hedge fund business, conducted a systematic review of this "brutal rotation" this week, pointing out that the speed and depth of this sell-off are historically rare, but its roots lie more in crowded positions and concentrated leverage rather than a substantive deterioration in the economy or corporate earnings. He stated that the unwinding of momentum factors is "approaching its end," but there is a lack of immediate catalysts for a reversal in the short term.

It is noteworthy that this momentum collapse occurred against a backdrop of overall stability in macro and corporate fundamentals—U.S. banking reported a 17% year-on-year growth in corporate loans, TSMC raised its revenue growth guidance for 2026 to over 40%, and inflation data was also mildly below expectations. This divergence between fundamentals and market price behavior is the core contradiction in the current market.

Tech Momentum Factor Faces Historic Sell-off, Retracement Speed and Depth Exceed Historical Median

According to data from Morgan Stanley's Quantitative and Derivatives Strategy team (MS QDS), this momentum factor retracement has lasted 17 trading days, with a peak-to-trough decline of 28%. In contrast, the historical median retracement for momentum factors since 1999 is 22%, averaging 33 trading days.

This means that this round of decline has surpassed historical median levels in both speed and depth, marking the most severe since the 29% retracement from December 2022 to February 2023.

The situation in the tech sector is even more extreme. The TMT momentum factor (TMT MoMo) has dropped 40% from its peak, according to MS QDS data, making it the fastest and deepest sell-off of tech momentum factors in history.

From various sub-sectors, the Korea Composite Stock Price Index (Kospi) has dropped 27% from its peak, U.S. AI tech beneficiaries have fallen 25%, global memory chip stocks are down 36%, and European semiconductors have decreased by 23%. Among these, memory chip stocks account for about two-thirds of the overall decline, while broader AI beneficiaries have dropped about 24% from their highs.

Apparent Low Volatility Masks High Intensity Inside, Market Risk Structure is Disintegrating

The price drop is merely the surface of this turmoil; the changes in the internal risk structure of the market are equally noteworthy.

According to Goldman Sachs' volatility trading desk data, the volatility of Goldman Sachs' high beta momentum portfolio (GSPRHIMO) is currently about 10 times that of the S&P 500 index volatility. In the historical context of the past 20 years, such a disparity in volatility ratios has only been comparable to the pandemic shock period in November 2020.

Meanwhile, the gap between individual stock volatility and index volatility has widened to historical extremes. Goldman Sachs data shows that the three-month implied average correlation of S&P 500 constituents dropped to a historical low of 0.14 this week, causing the S&P 500 index volatility to remain low, while the average implied volatility of individual stocks reached 40%, which is 2.8 times that of the index implied volatility, also setting a historical record.

Positions Still Crowded, Risks Not Cleared

Despite the recent historic-level retracement of the momentum factor, hedge funds' net exposure to it remains high from a long-term perspective. Data from JPMorgan shows that the current combination of position levels and retracement magnitudes makes the momentum factor continue to be regarded as one of the most concerning core risks in the market.

At the same time, the Goldman Sachs high beta momentum factor has dropped 33% from its June peak, and its year-to-date gain has plummeted from 60% to just 12%, which Mark Wilson also noted.

He cited signs of deleveraging in the Korean market as evidence: reports indicate that this week, about 1 in every 30 Korean adults had their stock margin accounts forcibly liquidated, showing that the deleveraging process has already begun to a considerable extent.

Fundamentals Intact, Risks Lie in Positions and Structure

The uniqueness of this momentum collapse lies in the fact that it occurred against a backdrop of generally positive corporate fundamentals and macro data.

Mark Wilson pointed out that the U.S. banking sector's earnings reports this week presented a "clear and unequivocal positive interpretation" of the economic situation: corporate loans grew by 17% year-on-year, setting a historical record and covering all sectors of the economy; U.S. consumer spending tracking growth is in the mid-single digits, with credit card spending increasing by 6%; investment banking-related business lines collectively grew by over 40%; and large banks' tangible equity return rate reached 19%, a new high since the financial crisis.

In terms of tech capital expenditures, TSMC raised its revenue growth guidance for 2026 to over 40% (based on a revenue base of over $150 billion), and ASML's earnings report sparked market expectations for its future earnings per share to be revised up by 15% to 30% over the next one to three years.

However, both companies' stock prices fell after the earnings announcements, showing a typical "buy the rumor, sell the news" pattern. In contrast, IBM's stock price hit its largest single-day drop in over 20 years due to delays in large contracts and disappointing consulting business performance.

Mark Wilson emphasized that this round of sell-off "is difficult to find clear signals on the fundamental level," reflecting more structural factors such as positions, leverage, crowding, and concentration.

Rotation Approaching Its End, but Reversal Catalysts Yet to Appear

Mark Wilson stated that he tends to believe that the unwinding process of momentum factors is approaching its end, but at the same time pointed out that there is a lack of immediate catalysts to drive a market reversal in the short term.

He also indicated that as efficiency and commercial viability improve, new leading directions in the market will gradually emerge, and market breadth will expand accordingly—an example being the Dow Jones Transportation Index breaking new highs again this week.

However, he also warned that the second derivative of earnings growth (i.e., the slowdown in growth) will become increasingly important as the market digests the second-quarter earnings reports and enters summer, while current valuation indicators show that tech sector valuations remain elevated.

Additionally, traditional asset classes and the correlations within assets are showing abnormal breaks, such as the three-month correlation between gold and oil dropping to extreme inverse levels in 35 years of history, making risk management and portfolio construction increasingly challenging.

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