Goldman Sachs Trading Desk: The Sell-off of Momentum Stocks in the U.S. is Fierce, Unseen Since 2020! But No 'Panic' Yet, Retail Investors are the Biggest Support

Retail investors are net buyers against the trend, reaching the 90th percentile of the past three years, becoming the biggest support.

Written by: Dong Jing, Wall Street Insights

U.S. high-beta momentum stocks have faced the most severe sell-off in this round, but the market has not fallen into a panic.

Goldman Sachs' trading desk characterized July 7th trading as "an ugly day" in its latest recap report. Following Samsung's revenue slightly below buyer expectations and news of DeepSeek's self-developed AI chip, the global AI sector experienced a chain sell-off, with the high-beta momentum factor (GSPRHIMO) plunging about 6% in a single day, and a cumulative decline of over 20% in five days, exceeding Goldman Sachs' previous expectations of a "brief summer correction."

Goldman Sachs trader Guillaume Soria stated that the speed and magnitude of this sell-off are unprecedented since the switch from the "stay-at-home narrative" to "reopening" during the COVID-19 pandemic in 2020, but at that time, there were stronger fundamental catalysts, whereas this round lacks equally strong driving factors.

Despite the fierce sell-off, Goldman Sachs' trading desk clearly stated that "panic mode has not been seen on the trading desk." The current de-risking behavior remains orderly, primarily driven by systematic/factor flows rather than panic liquidations. Meanwhile, retail investors have become the most important support force in the market—turning to net buying during the day, with net inflows at the 90th percentile of the past three years at the close.

Notably, data from UBS's cash trading desk also shows that excessive selling flows remain moderate and do not constitute a panic signal, but they warn that if the sell-off continues, the situation may shift from orderly to panic liquidation.

AI Sector Faces Chain Impact, Momentum Factor Drops Over 20% in Five Days

The trigger for this round of sell-off comes from the global AI supply chain.

On July 7, Samsung released preliminary results, recording a record operating profit, but revenue slightly below buyer expectations led to a 9% drop in stock price in the Korean market in a single day. Meanwhile, DeepSeek announced it would start developing its own AI chips, further exacerbating market concerns about the AI hardware landscape, triggering a spillover sell-off in the global AI complex.

In the semiconductor ETF and leveraged ETF sectors, trading volume surged. According to Goldman Sachs data, SOXL's trading volume was 35% higher than the 30-day average, with the product down 50% from its historical high set 10 trading days ago; DRAM-related trading volume was 60% above average; and SMH's trading volume was 30% higher.

Goldman Sachs TMT expert Peter Bartlett pointed out that although the overall fundamental view of the tech sector remains positive, especially among professional tech investors, buying and defensive operations have clearly become "selective" in recent weeks, significantly cooling compared to the frenzied buying pace of May and early June.

Goldman Sachs' trading desk noted that SK Hynix's upward guidance and META's cloud business dynamics are considered triggering factors, but "the fundamental view remains positive," which is also one of the important reasons why it has not evolved into panic.

Orderly De-risking Rather Than Panic Liquidation, but Risks Remain

Despite the fierce market sell-off, both Goldman Sachs and UBS's trading desk data point to the same conclusion: the core of the current sell-off is deleveraging, not new short positions.

UBS's cash trading desk observed that selling pressure mainly comes from long-term accounts, while hedge funds primarily engage in tactical operations—mainly short covering and selective additions, which corroborates the judgment of "deleveraging-driven" rather than "bearish-driven."

However, the risks cannot be ignored. From a technical perspective, the high-beta momentum (GSPRHIMO) and the broad AI index (GSTMTAIP) have not yet entered the oversold zone despite the current declines, with a year-to-date increase still as high as 23%; and from a five-year perspective, related positions remain in an extremely crowded state.

Goldman Sachs' trading desk bluntly stated: in the absence of upward catalysts, there is still more room for sell-offs.

Additionally, July has historically been one of the worst-performing months for momentum factors, and this month is on track to become the worst July on record for high-beta momentum. Historical data from Goldman Sachs shows that the maximum historical drawdown for this factor is about twice the current decline, indicating that if market leadership shifts, the current decline may still significantly expand.

As institutions generally retreat, retail investors' counter-trend buying has become the most significant structural feature of this round of the market. Goldman Sachs data shows that retail investors turned to net buying during the day and continued to increase their positions, ultimately achieving net inflows at the 90th percentile of the past three years at the close, making them one of the most important support forces in the market that day.

Meanwhile, the internal structure of the market has not collapsed completely. Among the S&P 500 index, 283 constituent stocks rose on that day, showing a certain breadth of support, echoing Morgan Stanley strategist Michael Wilson's earlier proposed theme of "market continued diffusion."

In the face of the current situation, Goldman Sachs trader Guillaume Soria's attitude is cautious, believing that characterizing the 20% five-day decline as a "healthy correction" is overly far-fetched, but pointed out that after a strong performance of 57% in the first half of the year, the extreme positions of momentum factors have been reset—from a historical high a month ago to the 60th percentile of the past year, with overall performance still remaining strong.

Soria believes that we may currently be in the "late stage" of this round of adjustment, but if negative news widens the gap into a chasm and market leadership shifts, it could evolve into a deeper correction.