Is the tech stock sell-off wave with the fastest drop speed and the largest decline in history nearing an end?｜Tech stocks, sell-off wave - ChainCatcher

Source: Wall Street Insights

Technology momentum trading is going through the most severe unraveling in history. In just 17 trading days, the US tech momentum factor (TMT MoMo) has fallen 40% from its peak, setting records for the fastest and deepest drawdowns ever, with its impact spreading across the board—from semiconductors and hedge funds to the credit markets.

This week, Mark Wilson, a Goldman partner and head of the EMEA hedge fund business, conducted a systematic review of this “brutal rotation,” pointing out that both the speed and depth of this sell-off are historically rare. However, he said the root causes are more related to non-fundamental factors such as crowded positioning and concentrated leverage, rather than a substantive deterioration in the economy or corporate earnings. He said the momentum factor’s position-closing/de-risking process is “close to the finish line,” but in the short term there is a lack of catalysts that could immediately reverse the trend.

What’s worth noting is that this momentum breakdown is happening against a backdrop where macro conditions and corporate fundamentals are generally solid. US banks reported year-over-year growth of 17% in corporate loans; TSMC raised its 2026 revenue growth guidance to above 40%; and inflation data was also mildly below expectations. This divergence between fundamentals and market price behavior is the core contradiction in the market right now.

Tech momentum factor hit the strongest sell-off in history; drawdown speed and depth exceed the historical median

According to data from the Morgan Stanley Quantitative and Derivatives Strategies team (MS QDS), this momentum factor drawdown has lasted 17 trading days, with a peak-to-trough decline of 28%. By comparison, since 1999, the historical median drawdown for the momentum factor has been 22%, with an average duration of 33 trading days.

This means this sell-off has surpassed the historical median in both speed and depth, making it the most severe drawdown since the 29% drop from December 2022 to February 2023.

The tech sector situation is even more extreme. The TMT momentum factor (TMT MoMo) has fallen 40% from its peak. According to MS QDS data, this is the fastest and deepest sell-off of the tech momentum factor ever recorded.

Looking across different sub-sectors: the Korea Composite Stock Price Index (Kospi) is down 27% from its peak; US AI beneficiary stocks are down 25%; global memory chip stocks are down 36%; and European semiconductors are down 23%. Among them, memory chip stocks account for about two-thirds of the total decline, while the broader basket of AI beneficiary stocks is down about 24% from its highs.

Low surface volatility conceals high internal intensity; the market’s risk structure is unraveling

Price declines are only the outward manifestation of this turmoil. Changes in the market’s internal risk structure are also drawing attention.

According to data from Goldman’s volatility trading desk, the volatility of Goldman’s high-beta momentum basket (GSPRHIMO) is currently about 10 times the volatility of the S&P 500 index. Over the past 20 years of historical backtests, situations with such a wide disparity in volatility ratios have only been comparable during the pandemic shock in November 2020.

Meanwhile, the gap between a single stock’s volatility and index volatility has widened to a historical extreme. Goldman data shows that the 3-month implied average correlation among S&P 500 constituents has fallen this week to 0.14, the lowest level in history. This keeps S&P 500 index volatility low, while the average implied volatility of individual stocks remains as high as 40%—2.8 times the index’s implied volatility—also setting a historical record.

Positioning is still crowded; risk has not been fully cleared

Although the momentum factor has recently experienced drawdowns at historical levels, hedge funds’ net exposure to it remains high from a long-term perspective. JPMorgan data shows that the combination of current positioning levels and the magnitude of the drawdown keeps the momentum factor regarded as one of the market’s most worrisome core risks.

At the same time, Goldman’s high-beta momentum factor is down 33% from its June high. Its year-to-date gain has plunged from 60% to just 12%, and Mark Wilson has also flagged this.

To support his point, he cited evidence of deleveraging in the Korean market: according to reports, this week, about 1 out of every 30 Korean adults had their stock margin accounts forcibly liquidated, indicating that the deleveraging process has already unfolded to a considerable extent.

Fundamentals are fine; the risk is in positioning and structure

A special feature of this momentum rout is that it is occurring amid broadly improving corporate fundamentals and macro data.

Mark Wilson pointed out that this week’s earnings from US banks show an “unmistakably positive interpretation” of the economic environment: corporate loans grew 17% year over year, hitting a historic high and spanning all sectors of the economy; US consumer spending growth tracked in the mid-single digits, with credit card spending up 6%; related business lines at investment banks grew by a combined total of more than 40%; and the return on tangible shareholders’ equity for large banks reached 19%, the highest level since the financial crisis.

On the technology capital expenditure front, TSMC raised its 2026 revenue growth guidance to above 40% (based on a revenue base of more than $150 billion), and ASML’s earnings have led the market to expect that its earnings per share will be raised by 15% to 30% over the next one to three years.

However, both companies’ stock prices fell after their earnings were released, showing a typical “good news runs out” pattern. By contrast, IBM’s shares posted the largest single-day drop in more than 20 years due to delays in large contracts and consulting business that fell short of expectations.

Mark Wilson emphasized that it is difficult to find clear signals at the level of fundamentals behind this sell-off; it reflects structural factors more such as positioning, leverage, crowding, and concentration.

The momentum rotation is nearing the end, but reversal catalysts still need to appear

Mark Wilson said he tends to believe that the momentum factor’s de-risking/position-closing process is close to the finish line, but he also pointed out that in the short term there is a lack of summer catalysts that could immediately drive a market reversal.

He also suggested that as efficiency and the ability to execute commercially improve, new directions for market leadership will gradually emerge, and market breadth will expand accordingly—for example, the Dow Jones Transportation Index breaking above its highs again this week.

However, he also warned that the second derivative of earnings growth (i.e., the slowdown in growth) will become even more important as the market digests Q2 earnings and moves into summer, and current valuation metrics show that technology sector valuations remain too high.

In addition, correlations within and between traditional asset classes are showing abnormal disconnections—for example, the 3-month correlation between gold and oil has fallen to an extreme level in the past 35 years. This further increases the difficulty of risk management and portfolio construction.