Its All One Big Trade: Momentum Euphoria and Hedging

US equity markets are being driven almost exclusively by a concentrated AI-momentum trade, which has reached historically narrow breadth. Goldman Sachs warns that similar momentum peaks often precede drawdowns and suggests hedging via defensive or 'insensitive' portfolios.

Key Takeaways

• 1.The US equity market rally is extremely narrow, with the TMT sector accounting for 85% of S&P 500 YTD returns.
• 2.Momentum factor leverage and hedge fund exposure are near 5-year highs, driven primarily by the AI infrastructure trade.
• 3.Sharp 3-month momentum rallies that occur near equity market highs have historically preceded periods of weaker market returns.

Table of Contents

• What happens next?
• How to hedge the coming momentum hangover
• Insensitive Portfolio

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