Goldman Warns Top Clients: Unprecedented Cracks in AI Momentum Trading, Recommends Hedging

Goldman Sachs has issued a rare warning to its top clients: deep cracks are emerging in the AI momentum structure—the AI theme basket has fallen nearly 45% from its peak, the single-day performance gap between short-term and long-term momentum hit a five-year high, and funds are accelerating out of semiconductors into software. Goldman explicitly recommends that investors with AI exposure initiate hedging.

Goldman Sachs is warning its most senior sales and trading clients that the AI momentum structure underpinning the strongest trading theme of this decade is showing deep cracks, and recommends that investors with related exposure begin hedging.

According to the latest report sent to top clients by Goldman strategist Guillaume Soria, on September 15, the 3-month momentum factor (GSPRHMO3) rose 5% in a single day, while the 12-month momentum factor (GSPRHIMO) fell 6.7% the same day, marking the largest performance gap in five years. Meanwhile, Goldman's AI theme basket (GSPUARTI) has fallen nearly 45% from its peak, the steepest drawdown since the launch of ChatGPT. Goldman believes that if this trend continues, the momentum factor will begin to decouple from the AI theme.

In terms of market impact, Goldman explicitly states that hedging the momentum factor in the short term "remains justified," especially given that momentum factor volatility is significantly higher than broad market index volatility—on that day, the S&P 500 fell less than 30 basis points, while the momentum factor experienced violent internal swings. Goldman recommends that investors with AI exposure consider hedging by buying put options on the medium-term winners basket (GSXUHMOM) or the AI beneficiaries basket (GSTMTAIP). For GSTMTAIP, a one-month put option with a strike price at 95% of the current price has an indicative cost of approximately 2.02%, with a tenor of 27 days.

Historic Split Within the Momentum Factor

The core warning in Goldman's report is that the performance divergence between short-term and long-term momentum has reached an abnormally extreme level. The single-day performance gap between 12-month and 3-month momentum is the largest in five years, indicating that the market is rapidly abandoning previous long-term winners and chasing new short-term leaders.

From a positioning perspective, the concentration of momentum factor holdings has already been partially digested—at the 41st percentile on a one-year lookback basis, a notable decline from earlier—but on a five-year lookback basis, positioning remains at the 88th percentile, implying that systemic deleveraging pressure has not yet been fully released.

Goldman notes that the correlation between the momentum factor and the AI theme remains extremely high, with correlation coefficients ranging from 90% to 96% across horizons from 1 month to 1 year. However, it is precisely this tight linkage that makes the continued decline in AI particularly structurally damaging to the momentum factor.

Funds Rotate from Semiconductors to Software, Reshaping the Landscape

Another important change within the momentum factor is the reversal of sector rotation. Short-term momentum is pulling out of the semiconductor sector and rotating into software—a sector that was among the most unloved at the start of the year. Goldman data shows that the software relative to semiconductors performance indicator (GSPUSOSE) recorded its second-best single-day performance ever on that day.

Goldman believes this rotation trend has already spread from 3-month momentum to 6-month momentum, and if selling pressure persists, it is expected to further transmit to 12-month momentum. Looking ahead to the next rebalancing of momentum baskets, Goldman expects long additions and short covering in software, along with reductions in semiconductors, which will structurally reshape the composition of the momentum factor.

Notably, the software sector was previously the highest-weighted sector in the short leg of the 12-month momentum factor, and its rebound itself is intensifying pressure on the long-term momentum factor.

Goldman Recommends Top Clients Initiate Hedging

The audience for this warning itself sends a signal. It is understood that Goldman's report was not distributed through the ordinary sell-side distribution list, but was sent directly to the bank's most senior sales and trading clients, with a priority far higher than regular research distribution channels.

In terms of specific operational advice, Goldman suggests that clients with AI exposure in their portfolios consider hedging via put options on GSXUHMOM or GSTMTAIP. Taking GSTMTAIP as an example, a one-month put option with a 95% strike price has an indicative cost of approximately 2.02%, with a tenor of 27 days, making the hedging cost relatively manageable.

Goldman also emphasizes that the volatility of the momentum factor relative to broad market index volatility is now significantly elevated, and this divergence itself constitutes a reasonable basis for hedging. Against the backdrop of the S&P 500 falling less than 30 basis points on the day, the violent internal swings in the momentum factor highlight the factor's current fragility.