The winning strategy of the US stock market suddenly failed! Momentum trading suffers a historic retreat: funds withdraw from technology and value stocks become the new favorite.

For many years, chasing momentum in the stock market has always been a winning strategy, but this strategy suddenly failed in the past week. As a "chase high and kill low" investment strategy, momentum trading experienced the second largest single-day drop since the 2020 pandemic on Wednesday, even exceeding the sell-off triggered by the DeepSeek last year and the decline caused by the tariff crisis in April. Data from the high beta momentum stock portfolio compiled by Goldman Sachs Group, Inc. showed that this drop wiped out all the gains of companies in the storage chip, metal and rare earth mining, and technology application development sectors so far this year. The collapse of this momentum strategy is part of a comprehensive sell-off caused by the weakening trend of the U.S. stock market this year, with the direct trigger being the severe volatility in the software sector - market concerns that artificial intelligence (AI) applications may have a substitutive effect on some companies, leading to a drop of more than 20% in this sector. However, in this round of selling, there are still sectors that are strong against the trend, which also brings comfort to investors who have not given up on the bull market. Investors pointed out that stock prices of clothing retailers, travel companies, and home goods manufacturers have been continuously rising, and value stocks that previously performed poorly have seen significant inflows of funds. The market is witnessing a broad style shift, with funds moving out of the technology sector and into sectors that have stronger correlation with economic recovery. The value stock long-short strategy investment basket compiled by UBS Group AG has seen a rise of 20% since last week, and the value stock relative to growth stock factor index compiled by Barclays has hit one of the largest historical single-day excess returns on Thursday. American quantitative stock strategist Christopher Cain said, "After several years of large tech stocks leading the growth market, the leading sectors driving the market upward have shifted from crowded momentum stocks to value stocks, small-cap stocks, and other areas that were previously ignored by the market. This is a healthy market change." However, as of now, the significant drop in the technology sector and its high weight in the index have not been offset by the gains from this style shift. The S&P 500 index fell 1.2% on Thursday, marking the third consecutive trading day of declines, with a cumulative drop of 0.7% since 2026. Tech stocks have almost become synonymous with momentum trading, especially with the software companies that have been hit hard in this recent plunge. The latest financial reports released by several tech giants further exacerbated the market's cautious sentiment. Alphabet Inc. Class C (GOOGL.US) achieved steady revenue growth but disclosed that capital expenditures in 2026 will far exceed market expectations; Qualcomm (QCOM.US) released weak revenue outlook; Arm (ARM.US) sales expectations exceeded the forecasts of most institutions, but failed to reach the market's most optimistic valuation levels. In terms of fund holdings, this sell-off occurred after a historic peak in momentum trading. Data from the trading department of Goldman Sachs Group, Inc. shows that the market's exposure to momentum stocks has been in the 99th percentile over the past year, and even reached the 100th percentile over the past five years; the volatility of the momentum factor is also at an extremely high level compared to historical levels. However, the trading team of Goldman Sachs Group, Inc. also pointed out that there are still comforting factors for investors considering positioning themselves in the pullback. The team wrote in their report, "From historical experience, a pullback in momentum stocks is a good buying opportunity in the medium term." They also reminded that considering the sharp rise of this factor in the past and the current high holding level, short-term hedging is still a reasonable choice.