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On July 18, 2024
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[1]
Goldman: Time to hedge momentum as rotation continues By Investing.com
Momentum refers to the concept that suggests "what worked yesterday will continue to work tomorrow," and the recent market rotation might indicate a shift in the prevailing conditions, according to analysts at Goldman Sachs (NYSE:GS). Momentum has thrived so far in an environment marked by higher interest rates and has become closely linked with dominant secular themes. "Two soft CPI prints in a row and the possibility of a July rate cut suggest we could still be on track for a soft landing, and the lower quality, risk-on assets part of the short leg of momentum may continue to outperform," analysts said in a note. However, the question remains whether the strategies that have worked over the past six months will continue to be effective as rate cuts are repriced, political regime change probabilities rise, and AI valuations are reassessed. "We think it could make sense to take profit on momentum gains given the change in the market dynamics as the rotation we pointed out last week continues," they added. Although AI valuations appear stretched, earnings reports are not imminent, and with no short-term catalysts, there might be potential for a short-term pullback, coinciding with underperformance in the size factor. Momentum experienced its best year on record, driven by the outperformance of the long leg - AI and secular themes - and the underperformance of the short leg amid higher rates. U.S. equities fell sharply on Wednesday as declining microchip stocks, amid potential escalations in U.S.-China trade conflicts, amplified the ongoing rotation out of mega-cap tech stocks. A report indicating that the Biden administration is considering strict trade restrictions against China led to a 6.8% drop in microchip stocks, marking the Philadelphia SE Semiconductor index's largest one-day decline since March 2020.
[2]
Goodbye AI, hello regionals: The stock theme rotation in one chart (NYSEARCA:SPY)
Investors should be hedging momentum as the rotation in equities gains traction, according to the Goldman Sachs trading desk. The global chip selloff Wednesday led to the Nasdaq's (COMP.IND) worst session since 2022, but the more-AI-insulated Dow (DJI) topped 41,000. "Is what has worked the last 6 months still going to work when rate cuts are repriced, political regime change probabilities are increasing, and AI has re-rated?" Goldman's FICC & Equities desk asked. "We think it could make sense to take profit on momentum gains given the change in the market dynamics as the rotation we pointed out last week continues, illustrated by the worst 5 day streak of Large Caps (NYSEARCA:SPY) (IVV) (VOO) over Small Caps (NYSEARCA:IWM) since 2020." The desk provided this chart of rotation in the last five days compared to where the money had gone through July 9.
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Goldman Sachs recommends hedging momentum as the stock market experiences a significant rotation. Investors are shifting focus from AI-related stocks to regional banks, marking a notable change in market trends.
In a recent note to clients, Goldman Sachs has advised investors to consider hedging their momentum exposure as the stock market undergoes a significant rotation. The investment bank's strategists, led by Cecilia Mariotti, highlighted the potential risks associated with the ongoing shift in market trends 1.
The most notable aspect of this rotation is the shift away from artificial intelligence (AI) related stocks, which have been market darlings for much of the year. Instead, investors are now turning their attention to regional banks, signaling a dramatic change in market sentiment 2.
This market rotation can be attributed to several factors:
The rotation has had a significant impact on market leaders. Tech giants that have heavily invested in AI, such as Nvidia and Microsoft, have seen their stock prices come under pressure. Conversely, regional banks, which had previously underperformed, are now experiencing a resurgence of investor interest [2].
Goldman Sachs suggests that investors should consider hedging their momentum exposure through various strategies:
This market rotation presents both challenges and opportunities for investors:
As the market continues to evolve, investors will need to stay vigilant and adaptable to navigate these shifting trends effectively. The rotation from AI to regional banks serves as a reminder of the dynamic nature of financial markets and the constant need for strategic portfolio adjustments.
Reference
[1]
The financial markets are experiencing a significant shift as investors engage in rotation strategies. This trend is reshaping investment patterns across various sectors and asset classes.
2 Sources
Goldman Sachs analysts highlight the importance of earnings revisions in determining the sustainability of the AI-driven market rally. They also provide insights on where to invest in the current market landscape.
2 Sources
As the Federal Reserve signals potential rate cuts, investors are preparing for a significant market rotation. The focus is shifting from high-performing tech stocks to undervalued sectors, potentially reshaping the investment landscape in the ongoing bull market.
9 Sources
The AI technology sector experiences a rollercoaster of investor sentiment, with some stocks maintaining momentum while others face skepticism. Concerns over heavy spending and slowing earnings growth cast shadows on the industry's future.
4 Sources
BlackRock remains optimistic about the S&P 500, viewing potential pullbacks as buying opportunities. Meanwhile, the tech sector is anticipated to continue delivering strong earnings, despite recent market volatility.
2 Sources