Tech momentum sell-off hits 40% in fastest decline on record

The unwind of the momentum trade has erased 40% from the TMT factor basket in 17 trading days — the fastest and deepest drawdown in market history.

Goldman Sachs' high-beta momentum portfolio has plunged 33% from its June peak, marking the sharpest unwind of the momentum trade since the early 2000s, as a brutal rotation out of high-flying technology stocks rips through global equity markets.

"Over the past three weeks, market leadership has been tested, with the momentum factor delivering the sharpest sell-off since the early 2000s," a team of Goldman Sachs strategists wrote this week. Mark Wilson, the firm's EMEA head of hedge fund sales, described the move as a "brutal rotation" driven by crowding and leverage rather than any deterioration in corporate fundamentals.

The TMT momentum factor — a basket of the most crowded technology, media and telecom names — has fallen 40% peak-to-trough in just 17 sessions, surpassing the historical median drawdown of 22% over 33 days, according to Morgan Stanley's quantitative and derivatives strategy team. The broader momentum factor is down 28%, with storage chip stocks accounting for roughly two-thirds of the decline. South Korea's Kospi has dropped 27% from its peak, and a wave of margin calls hit roughly one in 30 Korean adults this week, according to local reports. The Invesco S&P 500 Momentum ETF, a popular proxy for the trade, is down 5% from its recent high.

The divergence between strong fundamentals and deteriorating price action is the market's central tension. US banks reported corporate loan growth of 17% year-over-year, investment banking revenue surged more than 40%, and large banks posted a 19% return on tangible equity — the highest since the financial crisis. TSMC raised its 2026 revenue growth guidance to more than 40%. Yet both bank stocks and TSMC sold off on the news, a pattern Wilson said makes this sell-off "difficult to find a fundamental signal" in.

Stock-Level Volatility Hits Record Divergence From Index

Beneath the surface, market risk structure is fracturing in unusual ways. The Goldman Sachs high-beta momentum portfolio is now roughly 10 times more volatile than the S&P 500 — a ratio not seen since the Covid crash in November 2020, according to the firm's volatility trading desk. The average implied volatility of individual S&P 500 stocks stands at 40%, or 2.8 times the index's implied volatility, a record gap. Meanwhile, the three-month implied correlation among S&P 500 components has fallen to 0.14, the lowest ever, meaning stocks are moving independently even as the index appears calm.

Where to Hide as Rotation Deepens

Goldman Sachs identified several pockets of the market with low correlation to the crumbling momentum trade. Dividend Aristocrats — S&P 500 companies that have raised payouts for at least 25 consecutive years — have the lowest correlation of any group, according to the bank's analysis. The ProShares S&P 500 Dividend Aristocrats ETF is up 7% this year. Real estate stocks have also held up, with the Vanguard Real Estate Index Fund ETF gaining 10% year-to-date, narrowly beating the S&P 500. Software stocks, battered earlier this year in the so-called "SaaSpocalypse," have rebounded 25% from their April lows, with Palo Alto Networks up 24% and CrowdStrike up 21% in the past month.

Wilson said he believes the momentum unwind is "close to the end" but cautioned that near-term reversal catalysts are scarce heading into the summer months. With Q2 earnings season underway, the second derivative of earnings growth — the rate at which growth is slowing — will become increasingly important, he said, while noting that tech valuations remain elevated across most metrics.

This article is for informational purposes only and does not constitute investment advice.