Is the Tech Stock Sell-Off Nearing Its End? Goldman Sachs: Market Crash 'Not Due to Deteriorating Fundamentals'

Goldman Sachs has indicated that the recent collapse in U.S. technology stocks stems from crowded positioning and concentrated leverage, not deteriorating fundamentals. The firm believes the deleveraging and forced liquidation process is 'nearing its end,' but warns that short-term reversal catalysts are lacking, valuations remain elevated, and structural market risks persist. The direction of the next rotation will likely only become clear after summer earnings reports are digested.

U.S. technology-related equities have recently experienced a rare 'rapid collapse.' Within just seventeen trading days, the momentum factor index tracking technology, media, and telecommunications stocks plunged 40% from its peak—the fastest and deepest drawdown on record—spreading impact from semiconductors and hedge funds to credit markets.

Mark Wilson, Goldman Sachs' head of hedge fund business for Europe, the Middle East, and Africa, provided a comprehensive analysis of this 'brutal rotation' this week, stating that the sell-off's speed and magnitude are historically unprecedented. However, he emphasized that the primary driver of the selling pressure is not corporate earnings or macroeconomic deterioration, but rather excessive market positioning and concentrated leverage. In other words, this is a 'structural' rather than a 'fundamental' collapse.

### Record-Breaking Speed of Decline, Memory and Semiconductor Stocks Hit Hardest

According to Morgan Stanley's quantitative and derivatives strategy team, this momentum factor declined 28% from peak to trough over seventeen trading days.

Comparing with historical records since 1999, the median drawdown for momentum factors is 22%, with an average duration of thirty-three trading days. This indicates that the current decline exceeds past levels in both speed and depth, making it the most severe since the 29% drawdown between December 2022 and February 2023.

Technology stocks were particularly hard hit. The momentum factor focused on technology, media, and telecommunications slid 40% from its peak. Morgan Stanley's quant team described this as the fastest and deepest collapse in the history of the tech momentum factor.

Breaking down by region and sector, South Korea's KOSPI index fell 27% from its high, U.S. AI-related stocks declined 25%, global memory chip stocks plunged 36%, and European semiconductor stocks dropped 23%.

Memory stocks accounted for approximately two-thirds of the overall decline, while AI-related beneficiary stocks collectively fell about 24% from their peak.

### Calm Surface, Turbulent Interior: Volatility Structure Shows Anomalies

Stock price declines are merely the surface manifestation of this turmoil; the internal risk structure of the market has also undergone rare changes.

Data from Goldman Sachs' volatility trading team shows that the firm's high-beta momentum portfolio currently has a volatility level approximately ten times that of the S&P 500 index.

Looking back at the past twenty years, the only comparable situation occurred during the November 2020 pandemic shock.

Additionally, the gap between individual stock volatility and index volatility has widened to historical extremes. Goldman Sachs reports that the three-month implied average correlation among S&P 500 components fell to 0.14 this week, a record low, keeping the S&P 500 index volatility low.

At the same time, however, the average implied volatility of individual stocks reached as high as 40%, 2.8 times that of the index's implied volatility—also a record high.

### Leverage Positions Not Yet Fully Unwound, South Korean Retail Investors Hit First

Despite the momentum factor's historically severe plunge, hedge fund net positions on this factor remain relatively high from a long-term perspective.

Data from JPMorgan shows that the current combination of position crowding and drawdown magnitude still makes the momentum factor one of the most concerning risk sources in the market.

Goldman Sachs' high-beta momentum factor index has fallen 33% from its June peak, and its year-to-date gains have dropped from a high of 60% to just 12%.

Wilson specifically noted that deleveraging signs in South Korea's market serve as a microcosm of this selling pressure. Reports indicate that this week, one in every thirty South Korean adults had their stock margin accounts forcibly liquidated, indicating that deleveraging has progressed to a significant degree.

### Strong Bank Earnings, TSMC Raises Outlook, Yet Stocks Fall Together

Paradoxically, this momentum collapse occurred against a backdrop of generally positive corporate fundamentals and macroeconomic data.

Wilson pointed out that the earnings reports released this week by major U.S. banks delivered an 'unmistakably positive signal' about the economy:

- Corporate loan growth reached a 17% year-over-year increase, a record high, with growth across all industries; - Consumer spending tracking data showed mid-single-digit growth, with credit card spending up 6% year-over-year; - Investment banking-related businesses collectively grew over 40%; - Large banks' return on tangible common equity reached 19%, the highest since the financial crisis.

Positive news also emerged in tech capital expenditure. Taiwan Semiconductor Manufacturing Company (TSMC, 2330-TW) raised its 2026 revenue growth outlook to over 40%, based on a revenue base exceeding $150 billion; ASML's (ASML-US) earnings report has led the market to anticipate potential EPS upgrades of 15% to 30% over the next one to three years.

Yet, both companies saw their stock prices fall after reporting earnings, exhibiting a classic 'sell the news' pattern.

In contrast, IBM (IBM-US) saw its stock price drop by the largest single-day percentage in over two decades due to delayed delivery of major contracts and underperformance in its consulting business.

Wilson admitted that this sell-off is 'difficult to explain clearly from a fundamental perspective,' with its roots more in structural issues such as crowded positioning, excessive leverage, and high concentration of capital.

### Rotation May Be Nearing End, But Summer Lacks Reversal Catalysts

Wilson judges that the deleveraging and liquidation process for the momentum factor may be nearing its end, but he also warns that there is a short-term lack of catalysts strong enough to immediately reverse the trend, especially as the market enters the typically quiet summer trading period.

He also noted that as companies continue to improve in efficiency and commercialization capabilities, new leading sectors may emerge, driving sector rotation and broadening market participation. The Dow Jones Transportation Average reaching a new high this week is one such signal.

However, he simultaneously warned that as the market digests Q2 earnings and enters summer, the 'second derivative' of earnings growth—whether growth is slowing—will increasingly attract market attention. Moreover, judging from current valuation metrics, technology stocks remain overvalued.

Additionally, correlations between traditional asset classes and within assets have shown rare fractures. For example, the three-month correlation between gold and crude oil has fallen to an extreme negative level not seen in thirty-five years, further increasing the difficulty of risk management and portfolio construction.