Beneath a seemingly calm surface in global equity markets, a historic unraveling of momentum strategies is accelerating. Goldman Sachs trader Benny Quek warns that positions in AI and technology sectors are far from cleared, with volatility expected to persist through the third quarter.

The momentum factor has now declined for five consecutive weeks, while leveraged ETFs are experiencing a historic collapse. Market sentiment has rapidly shifted from "fear of missing out" to "fear of holding." Simultaneously, the core narrative of the AI trade has pivoted from capital expenditure to profitability and return on investment, with credit spreads for hyperscale cloud providers widening sharply, putting pressure on markets.

Multiple pressures are building simultaneously—geopolitical conflicts, oil price fluctuations, interest rate trends, and resurgent tariff risks—all vying to dominate market pricing. While Goldman Sachs' risk appetite indicator remains elevated, the implied correlation among S&P 500 components is extremely low. This combination provides structural support for going long on equity index volatility.

Momentum Unraveling Enters Fifth Week, Leveraged ETFs Bear the Brunt

The collapse of the momentum factor is the most prominent structural feature of the current market.

According to Goldman Sachs trader Benny Quek in his latest "Weekend Thoughts" report, the liquidation of momentum strategies has been ongoing for five weeks, accompanied by a historic crash in leveraged ETFs.

For example, in the South Korean market, the size of leveraged ETFs has halved from a peak of $53 billion to roughly half. The proportion of leveraged exposure relative to the market's free-float market capitalization has dropped from a peak of 3.3% to 2.1%.

Daily rebalancing flows for Samsung and SK Hynix, as a percentage of average daily trading volume over the past month, have also fallen sharply from 40% and 26% to 15% and 14%, respectively. The KOSPI has fallen for five consecutive weeks, presenting an unsettling parallel to the trajectory of China's CSI 1000 index from 2014 to 2015.

U.S. markets are also under pressure. The high vs. low momentum stock hedge pair fell 8% on a single day last Friday. Although it still recorded a 4% gain for the week, the violent swings have fully revealed the fragility of positions.

AI Narrative Shifts, Credit Spreads for Hyperscalers Flash Warning

The logic of the AI trade is undergoing a fundamental transformation.

Quek points out that market focus has shifted from the headline capital expenditure figures of hyperscale cloud providers to more challenging core issues: profit margins, return on investment, and the rising scale of debt issuance.

Goldman Sachs estimates that year-to-date AI-related bond supply has reached $489 billion, with 40% coming from hyperscale cloud providers. This is equivalent to 1.5 times the full-year forecast for 2025. Meanwhile, credit spreads for these hyperscalers are widening sharply, making the pressure from rising debt financing costs impossible to ignore.

From a market capitalization perspective, the S&P 500 has added $31 trillion in value since December 2022. In contrast, Goldman Sachs' estimates of AI's potential value in base, optimistic, and blue-sky scenarios are $9 trillion, $8 trillion, and $28 trillion, respectively. This comparison suggests that the current market expansion has already significantly priced in AI's potential upside.

Positions Far From Cleaned, Volatility Remains the Theme for Q3

Quek explicitly states that he believes positions in AI, technology, and momentum strategies are far from the "clean" state anticipated by the market, and he remains highly vigilant about sustained high volatility in the third quarter.

He favors a "barbell" strategy for the current environment, simultaneously allocating to defensive assets and selective offensive positions to navigate directionless, choppy markets.

From a technical standpoint, while volatility in individual stocks and factors has surged dramatically, the implied correlation among S&P 500 components remains at extremely low levels. Quek notes that this divergence provides an additional structural reason to go long on equity index volatility—low correlation means index-level volatility is underestimated, and once correlation rises, index swings will be amplified.

Goldman Sachs' risk appetite indicator remains elevated, suggesting that overall market sentiment has not yet fully priced in the aforementioned risks, further supporting a cautious outlook on volatility.

Rotation and Divergence: Structural Opportunities in Asian Markets

Despite the overall pressured environment, signs of capital rotation are evident in Asian markets. The Indonesia Composite Index (JCI) has rebounded 16% from its low, and India has recorded the strongest monthly foreign inflows in the region. Capital is shifting from high-momentum, high-valuation sectors toward more defensive and value-oriented assets.

From a sector perspective, the rotation trend is even clearer. The relative price ratio of the software sector compared to semiconductors has broken above its 50-day moving average, indicating that structural rebalancing within the market is still underway.

Additionally, a noteworthy signal is emerging in the gold market: CFTC gold futures positioning is increasing, a metric historically leading to spot gold prices. Meanwhile, China's gold imports in June rose to a two-year high, highlighting the potential support from safe-haven demand that cannot be ignored.

Quek also expects the market to experience more headline-driven volatility as the U.S. midterm elections approach.

Historical data shows that U.S. stocks typically trade sideways before midterm elections and tend to strengthen afterward. This pattern could provide a temporary anchor for the currently pressured market, but until then, how much longer the momentum crash will endure remains the market's biggest question.

Global equities ended last week flat, but this figure masks the intense internal turmoil. Markets had previously largely ignored ongoing geopolitical conflicts, oil price trends, and interest rate changes, but these three forces have now simultaneously entered the market's spotlight, vying for pricing power.

At the same time, tariff issues are heating up again, adding fresh uncertainty to an already fragile market sentiment. Quek notes that volatility this year has been extremely exhausting for investors, and the market is in a complex phase where multiple narratives are intertwined, making direction difficult to discern.