Market dynamics and positioning
Goldman Sachs concluded that the recent reallocation across equity markets appears to reflect investor positioning more than changes to underlying business fundamentals. The bank highlighted one of the steepest reversals in momentum stocks in recent memory, noting a marked shift away from the markets prior winners into previously lagging groups.
Magnitude and composition of the unwind
Goldman quantified the adjustment in momentum exposure, pointing out that the momentum pair has lost roughly 8% since June 22 as participants rotated away from recent winners. The bank said liquidity conditions thinned heading into summer, leaving the market exposed to profit-taking after a robust first half.
The unwind has been particularly concentrated in the AI complex. Goldman noted that European Semiconductors have dropped about 12% from their June peak but remain up roughly 110% year-to-date. By contrast, the Software sector staged a modest rebound of about 5% over the same interval, while remaining down approximately 23% year-to-date.
Factor relationships in Europe
In Europe, the sectors showing the strongest positive correlations with Momentum this year include Hardware, Basic Resources, Telecoms, Utilities and Industrials. Conversely, Software, Consumer and Healthcare displayed the most negative correlations with the Momentum factor.
Goldman linked these patterns to its Capital Intensity framework. Under that rubric, companies with heavier asset bases benefit when demand is linked to rising capital expenditure, which has favoured asset-heavy sectors this year.
HALO framework and positioning view
Goldmans HALO framework - Heavy Assets, Low Obsolescence - captured this rotation, the bank said. The long Capital Intensive basket versus the short Capital Light basket is up about 20% year-to-date. Goldman interpreted the recent pullback in momentum names as a tactical reset rather than an indication that the broader theme has run its course.
Sectors showing resilience
Aerospace & Defence has outperformed its factor-implied return since June 22, supported by the bank as being underpinned by strong earnings momentum, rising commitments associated with NATO 3.0, persistent geopolitical tensions and robust government support, particularly in Germany and the UK. Healthcare also showed resilience, aided by relatively attractive valuations and defensive characteristics.
Q2 reporting season as the key test
Looking ahead, Goldman identified the Q2 corporate reporting season as the critical test of its positioning-driven thesis. Consensus forecasts anticipate about 11% year-on-year EPS growth in Europe. Excluding Commodity Producers, consensus EPS growth is a more modest 6%. Goldman noted that materially stronger-than-expected earnings would bolster the view that the recent unwind was primarily a positioning reset.