Stock market winners suffered their worst day in six years. What made the move unusual, according to Goldman.
Wall Street's high beta momentum stocks faced their worst day since the COVID pandemic, as noted by Goldman Sachs. The decline was attributed to a lack of strong earnings revisions and extreme short-term performance technicals. Key stocks affected include Enphase Energy, SanDisk, Lumentum Holdings, and Western Digital. Goldman warned that continued underperformance of past winners could lead to further market pain, despite no signs of panic yet. They recommend short-term hedging due to elevated volatility and positioning in the momentum strategy.
By Jamie Chisholm
High beta momentum names dive amid tech rout
Wall Street has suffered some volatile trading is recent days. Photo by ANGELA WEISS / AFP via Getty Images
A basket of volatile momentum stocks collated by Goldman Sachs suffered on Wednesday its worst session since the COVID pandemic, illustrating how the tech-sector angst currently roiling markets has swiftly turned many big winners into big losers.
"Our 'high beta' or unconstrained momentum basket is on track for its worst day since 2020 (surpassing the post-DeepSeek selloff last January)," said a team at Goldman led by Guillaume Soria in a note published late Wednesday.
That basket includes Enphase Energy (ENPH), SanDisk (SNDK), Lumentum Holdings (LITE) and Western Digital (WDC).
A high-beta stock is one that is significantly more volatile than the overall market benchmark. The momentum investing strategy is buying stocks that have been showing strong performance, or outperformance.
"There is no smoking gun for today's move, it just happens that the market is chasing the strongest earnings revisions possible, and in the midst of that, short term performance technicals got too extreme," said the Goldman team.
They added that the dive for a momentum basket - shown in the chart below - was primarily driven by the strong underperformance of past winners, with a focus on "cyclical high flying themes with high beta," citing memory, rare earth and nonprofitable tech stocks in particular.
"We flagged that Momentum looked stretched and is very crowded (99th percentile over 1yr, 100th percentile over 5 yrs)," they wrote.
Source: Goldman Sachs
Goldman warned that a larger unwind of the winners could cause more pain given high levels of investor exposure to the strategy.
They also noted noted that recent market action has left the volatility of the momentum factor near historic highs (see chart below), compromising what had been the strategy's best start to a year.
Source: Goldman Sachs
Unlike some previous big moves in momentum - such as the DeepSeek shock or news of COVID vaccines - the latest action is more a "consequence of elevated vols, stretched technicals, and higher thematic dispersion with no changes in expectations for some of the higher flying themes," said Goldman.
"However, we have not yet seen major signs of panic or capitulation, and given the very strong run for the factor and elevated positioning, we still think short term hedging makes sense here," they concluded.
-Jamie Chisholm
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02-05-26 0641ET
