Momentum stocks just saw one of the biggest reversals in five years. What usually happens next.

By Steve Goldstein

AI stocks slumped on Thursday after a big run-up in value.

There had been ample warnings that stocks with price momentum had shot up too quickly, and on Thursday gravity reasserted itself.

The iShares USA Momentum Factor ETF MTUM fell 1.8% on Thursday, its worst daily move since the end of March.

Goldman Sachs has a basket of what it calls high-beta momentum stocks, basically winners and losers over the last year, with an extra weighting on the outliers over the last month. At the moment that grouping combines going long companies including Bloom Energy (BE), Sandisk (SNDK) and Hut 8 (HUT), while going short companies including Centene (CNC), Atlassian (TEAM) and Strategy (MSTR). The basket fell 8%, one of its worst showings in five years.

The momentum trade ran out of juice on Thursday.

"Notably, this unwind is being driven by both the long and the short leg, given software names have had a better earnings season than anticipated and secular AI themes are selling off post extreme recent performance," said Guillaume Soria, who oversees U.S. factor products at the bank.

Soria argued optimism in the market may be starting to capitulate, as there are less upcoming catalysts now that the majority of earnings season is over, at the same time that valuations are stretched and positioning in momentum is at the 100th percentile over the last five years.

Soria says Goldman team favors "thoughtful short-term hedging solutions" in both momentum and across the AI complex to protect the surge in value.

Still, the historical data says big unwinds are actually opportunities to reload rather than a signal to get out.

Momentum declines of that magnitude are met by an average gain of 1.45% over a week and 22.9% over a year, Goldman data going back to 2006 finds.

-Steve Goldstein

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05-08-26 0421ET