Key Takeaways:
Global AI and technology stocks suffered their worst two-day liquidation in four years as overcrowded trades unwound, with chipmakers losing more than $1 trillion in market value.
The selloff pushed Magnificent Seven net exposure to its lowest in a year, at roughly the third percentile historically, Goldman Sachs Group Inc. Prime Brokerage data show.
"The scale of forced selling has effectively reset the crowding problem that plagued AI trades for months," said Lee Coppersmith, a top trader at Goldman Sachs. "Viewing 'overcrowding' as the biggest risk to AI positions is rapidly losing relevance."
Global information technology stocks recorded their largest two-day long liquidation since January 2021 and the second-largest concentrated deleveraging of the past decade, Goldman data show. Storage chip stocks worldwide suffered their most severe selloff on record, while technology fund flows plunged to among the weakest levels in history. Three hedge fund strategies — long-short equity, macro and equity market neutral — all fell more than 1 percent on the same day, a scenario last seen during the March 2020 pandemic-driven market collapse.
The selloff has been concentrated in AI-related names rather than broad-based, with the S&P 500 equal-weight index actually hitting a new high during the same period — a divergence that suggests the liquidation reflects position unwinding in overcrowded trades rather than systemic risk. The focus now shifts to Big Tech earnings and the Federal Reserve's upcoming policy decision for the next directional catalyst.
Korea Becomes Epicenter of AI Unwind
South Korea's KOSPI 200 index dropped 46 percent from its peak in just 27 trading days, making it the hardest-hit major market in the global AI deleveraging. The index found support at its 200-day moving average, with the 14-day relative strength index approaching 30 — a level that historically signals oversold conditions. SK Hynix Inc.'s earnings report, rather than providing a floor, triggered the latest wave of selling.
The volatility has drawn regulatory attention. South Korean authorities are discussing further tightening of margin trading rules, a move Coppersmith said could reduce market volatility over the long term but also means leveraged capital is unlikely to return quickly.
Rich Privorotsky, head of Goldman Sachs' One-Delta business, cautioned that storage chip stocks may offer only a trading bounce rather than a sustained recovery. "Even after this pullback, the opportunity looks more like a short-term oversold rebound than a structural entry point," he said. "Individual stock fundamentals will matter more than sector momentum going forward."
The unwind has been particularly violent for momentum-driven strategies. Momentum factor volatility is currently running at roughly nine times that of the broader market, a dislocation comparable only to the fourth quarter of 2020, when the Covid vaccine breakthrough and the US election triggered a dramatic style rotation. Medium-term momentum exposure, which had been at year-to-date highs, has rapidly collapsed. Historically, momentum reversals after crowded trades break tend to overshoot, and this episode already ranks among the more severe position cleansings of recent years, suggesting the bulk of forced liquidations may be complete.
What Comes Next
With positioning pressure easing, the market's attention turns to fundamentals. The first major test is the Federal Reserve's Federal Open Market Committee meeting, though S&P 500 options imply only about 70 basis points of movement — suggesting investors do not expect the meeting itself to be a new source of risk.
The real catalyst for a potential AI trade restart will be Big Tech earnings, where investors will scrutinize capital expenditure plans, profit margins and returns on AI investment. "After this kind of adjustment, long-duration capital can start reassessing allocations," Privorotsky said. "The semiconductor capital expenditure chain remains our preferred area for structural exposure."
This article is for informational purposes only and does not constitute investment advice.
