Goldman Sachs: Crowded Trades Collapse in July, U.S. Stock Bull Market Unbroken but More Challenging

In July, the US stock market did not witness a collapse at the index level, but rather a liquidation of positions. The S&P 500 held its ground this week, with a trading range of only 3.5% for the entire month of July, and is less than 2% from its peak. More counterintuitive, the equal-weight S&P, low-volatility S&P, and S&P 500 excluding AI all hit new all-time highs this week.

Tony Pasquariello, head of Goldman Sachs’ Hedge Fund business, wrote in the latest market commentary: "After a truly parabolic ascent of high-speed trading, over the past month a heavy hammer has smashed through consensus positions; I tend to think this frenzy has now cooled." The key is not that risk has disappeared, but that the most crowded, smoothest, and most leveraged trades have been forced to cool down.

Surface calm and underlying turbulence are happening simultaneously. The S&P 500’s average daily volatility this week was less than 1%, but Goldman’s flagship momentum basket saw nearly 10% daily volatility. On June 22, Goldman Sachs’ TMT momentum basket was up as much as 145% year-to-date, but then suffered the worst recorded drawdown, only to rebound 17% in a single day afterwards. Asian fundamental long/short funds posted record performance in the first half-year, only to experience the largest one-month drawdown of the past decade, while Korea’s KOSPI surged 18% overnight.

This framework ultimately leads to a somewhat uncomfortable conclusion: The US stock market outlook remains relatively positive, but the risk-reward is no longer cheap, and the upside elasticity of global equities is weaker than before. The bull market is not out, but this is no longer the stage for "buy and hold for win" strategies.

The Index Did Not Collapse, Crowded Trades Did

The easiest mistake to make in July was looking only at the S&P 500.

The index did not send a panic signal. The S&P 500 is less than 2% from its peak, and July’s range is only 3.5%, appearing as normal fluctuation. But underlying active managers have experienced an entirely different market: hot momentum trades, AI-related stocks, Korean equities, and Asia long-short strategies have all been squeezed out of leverage one by one.

The problem is not how much is lost on any single day, but that the best-performing trades suddenly lost their liquidity. If you were long the S&P 500, you saw stability; if you were in high-momentum tech stocks, you saw near-uncontrollable volatility.

This was the key split in July: little turbulence at the index level, but positions-wise, a group of boats has already capsized.

Deleveraging Is Not a Minor Adjustment, But a Real Purge

A few data points indicate that this round of deleveraging goes beyond normal portfolio rebalancing.

Global tech exposure has seen the largest selloff in over five years. Asset management of leveraged ETFs in Korean stocks reached $53 billion at its June peak and has now dropped to $15 billion. Goldman’s Prime Brokerage reported the largest total exposure reduction since the end of 2022.

More granular position changes point in the same direction: fundamental long/short clients’ leveraged exposure to momentum factors has fallen to the 28th percentile of the past year. Crowded trades have gone from "everyone is on board" to a significant portion having left—some even forced off the train.

This doesn’t mean painful trades will not return. But compared to early July, there’s noticeably less chasing in the market, and more cash and discipline.

The Contradiction with AI Trades Shifts from Narrative to Returns

In the second half of July, AI trades faced not just profit-taking, but a more fundamental question: can hyperscale cloud vendors’ huge AI capital expenditures yield returns that are clear and sustainable enough?

Last week, market skepticism on this issue intensified. This week, the answers were mixed but not as bad as the most pessimistic expectations.

Meta did not show that significant AI returns have already been reaped; Microsoft provided clearer signals, with capital expenditures turning into revenue and AI products, and at scale; Amazon then reported a re-acceleration of AWS growth and expanding cloud business margins. The credit spreads of hyperscale cloud vendor bonds narrowed simultaneously.

This shift is important. If the AI trade is only about "huge investment, distant returns," valuations will struggle; but if some companies can prove that investments are beginning to turn into revenue, the market won’t indiscriminately cut the entire AI chain.

However, divergence has already emerged. The days when simply claiming an AI label could boost valuations are at least much harder after this round of cleansing.

Fed Communication Becomes Opaque, and Long-Term Rates Again Plague Equities

Following the FOMC meeting, stock traders did not feel much relief. Fluctuations at the long end of the US Treasury yield curve briefly spilled over into the equities market.

More troublesome is the change in communication style. Markets had grown accustomed to high transparency, but now it’s more restrained and less explicit. Traders must now infer policy direction with fewer clues, inherently raising friction.

The real focus should be on the policy trajectory, not every single phrase. But for stocks, changes in long-term rates cannot be ignored, especially for long-duration equities. Valuations of AI, tech, and growth stocks are more sensitive to distant discount rates; if the long end of the global bond market continues to put pressure, "stable base" does not mean comfort every day.

US Equities Still Have an Advantage, But Upside Elasticity Is Thinner

In the bigger picture, US equities still have support. The economy is performing well, earnings growth is strong, fund flows could turn more positive, and nearly $1 trillion of AI capital expenditure is still flowing through the system.

This explains why the S&P 500 could hold up even amid severe deleveraging underneath. The index is not risk-free, but has enough supporting factors to provide a floor.

But this is no signal for aggressive bullishness. US equities remain favorable, risk-reward is mid-range, but the upside elasticity for global stocks is less than in the prior phase.

More volatility lies ahead in the short term. Summer liquidity is a headwind for risk transfer; when positions are crowded, illiquid, and structurally complex, volatility is amplified. At the portfolio level, it’s better to increase liquidity and reduce complexity, rather than keep chasing the steepest trades.

The Nasdaq’s Answer: The Bull Market Remains, The Road Gets Tougher

The Nasdaq 100 is currently down 8% from its June peak, but still up 12% year-to-date. Over the past nine months, it declined in six, yet is up 9% point-to-point. The price-earnings ratio has dropped to the low end of its multi-year range.

This set of figures tells the market’s state clearly: the trend is intact, but the process is tough.

For trading, the finish line and the journey are two different things. The Nasdaq’s main trend bull market still exists, but if the future continues as "rise some, position shakeout, recover," then making money will be harder than just guessing the right direction. July has already given a warning: the market does not reward crowding, nor does it forgive leverage.