If you only watched the S&P 500 Index in July, you would think nothing happened. The index finished down just 0.1 per cent, still close to its record high. Beneath the surface, however, momentum had become almost synonymous with artificial intelligence and suffered one of its most violent crashes on record.
Goldman Sachs estimates its high-beta basket fell 41 per cent, its technology basket plunged 48 per cent and its AI basket lost 38 per cent. Even after a record rebound, high-beta momentum ended July down 28 per cent, its worst month on record, while an index excluding the major AI enablers reached a fresh high.
The AI trade is extremely compelling, but it had become dangerously overcrowded. Hedge funds, systematic strategies and multi-manager platforms all owned variations of the same semiconductor, memory and AI infrastructure winners.
Every dip was rewarded, attracting more capital and reinforcing performance, until investors rushed for the exit. The resulting unwind was
mechanical as much as psychological.
Much of the capital was governed by models responding to volatility, correlation and trend signals rather than managers judging valuation. Once those signals flipped, the models had to sell regardless of price. When many funds acted simultaneously, an ordinary repricing became a liquidity vacuum.
Source: https://www.afr.com/markets/equity-markets/beware-the-hidden-market-crash-beneath-wall-street-s-calm-surface-20260805-p60lqh