Key Takeaways:
The "buy everything AI" trade that dominated equity markets for two years is unwinding as hedge funds dump technology stocks at the fastest pace in months.
Hedge funds net sold US technology stocks for a fourth consecutive week through July 2, with Goldman Sachs' high-beta chip portfolio crashing 19% in two weeks, data from the bank's prime brokerage showed.
"The 'buy everything AI' trade is over — the market will now reward quality and execution, not beta," said Benny Quek, a Goldman Sachs trading desk strategist, in a weekly note to clients.
The selling pressure came primarily from long-only portfolio managers trimming single-stock positions, partially offset by macro product buying. Goldman's fundamental long-short equity strategy fell 1.53% during the June 26-July 2 period, with alpha contribution of negative 1.42% as both long and short sides lost money. The systematic long-short strategy fared worse, dropping 2.09%. The selloff in the Goldman Sachs High Beta Momentum Portfolio — a basket dominated by chip and memory stocks — included a historic two-day plunge over the past weekend.
The rotation marks a potential inflection point for the $6 trillion US equity market, where AI-related stocks had accounted for a disproportionate share of gains. With the S&P 500's blended Q2 earnings growth running at 23.3% year-over-year, according to FactSet, the question is whether fundamental strength can absorb the valuation reset. Markets are pricing at least one Federal Reserve rate hike late in 2026, and the Fed's July meeting minutes due Wednesday will be closely watched.
The outflows are not confined to the US. Japan's equity market suffered its largest monthly net selling on record in June, while selling in South Korea erased all year-to-date net buying, Goldman data showed. The speed of the reversal was stark: June's net selling in Asia nearly completely reversed May's record net buying, underscoring how quickly conviction around AI-related positioning can shift.
Asia-focused fundamental long-short funds bucked the trend, delivering roughly 7% returns in June even as the broader market declined about 1%. The outperformance was driven by short-term momentum, crowded long positions and a technology tilt, though Korea positioning and volatility weighed on returns.
Chips Lead the Rout
The semiconductor selloff has been the most violent. The Philadelphia Semiconductor Index tumbled 11% in two days, according to BofA data, as investors questioned whether AI-driven demand can justify valuations that the bank's Bubble Risk Indicator pegged at 0.91 for chips — near levels that preceded past corrections. JPMorgan strategists said the "outsized gains in US semiconductor shares compared with AI hyperscalers have produced a valuation disparity that is unsustainable."
The broader market showed signs of stabilization by the end of the week. The Nasdaq Composite closed at 25,832.67 on July 2, gaining 2.1% for the week, while the S&P 500 rallied as the Magnificent 7 — Microsoft, Meta, Amazon, Apple, Nvidia, Alphabet and Tesla — led the advance. But the underlying flow data tells a different story: BofA reported US stock funds saw $17.2 billion in withdrawals for the week ending July 1, the largest outflows since March.
What Comes Next
Quek characterized the selloff as more of a structural de-risking than a fundamental rejection of AI. "This looks like quarter-end rebalancing, summer seasonality, crowded positioning and style rotation — not a regime change," he said. Still, the concentration of selling in semiconductors and the record pace of Japan outflows suggest the adjustment may have further to run.
Goldman's year-end S&P 500 target stands at 8,000, with client expectations clustered in the 7,500 to 8,000 range. The path to that level depends on whether earnings growth — expected at 24.1% for calendar 2026, per FactSet — can validate current valuations as the AI trade transitions from beta-driven momentum to stock-specific differentiation.
This article is for informational purposes only and does not constitute investment advice.
