Momentum-focused ETFs slid Thursday as Wall Street’s high-flying AI and software trades abruptly reversed, triggering one of the sharpest factor unwinds seen this year and rattling investors who had piled into market leaders.
• iShares MSCI USA Momentum Factor ETF stock is at critical resistance. What’s driving MTUM to record levels?
The sell-off hit momentum strategies especially hard because many had become heavily concentrated in AI-linked and high-beta growth stocks after months of strong gains.
The iShares MSCI USA Momentum Factor ETF (BATS:MTUM) fell 1.8% on Thursday, its worst daily decline since late March. Other momentum-focused funds also weakened, including the Invesco Dorsey Wright Momentum ETF (NASDAQ:PDP) and Alpha Architect U.S. Quantitative Momentum ETF (NASDAQ:QMOM), as traders rotated away from richly valued growth names.
AI Winners Suddenly Reverse
The move coincided with a sharp decline in Goldman Sachs‘ high-beta momentum basket, which dropped 8% in one of its worst sessions in five years, per MarketWatch. The basket tracks stocks like Bloom Energy Corp (NYSE:BE) and Sandisk Corp (NASDAQ:SNDK) that have been winners or losers in the past year.
The sharp reversal suggested investors were rapidly unwinding some of the market’s most crowded trades, particularly across AI and software names that had surged over recent months. Goldman Sachs said in a note, cited by MarketWatch, that the momentum unwind is being fueled by weakness across both bullish and bearish positions, as software companies posted stronger-than-expected earnings while AI-related stocks pulled back after an extended rally.
Positioning Hits Extreme Levels
Goldman Sachs added that momentum positioning has now reached the 100th percentile relative to the past five years, signaling that the trade had become unusually crowded after investors aggressively chased AI winners throughout 2025 and early 2026.
With earnings season largely over and fewer near-term catalysts ahead, traders appear increasingly concerned about stretched valuations and elevated expectations for AI-related companies.
The recent pullback also highlighted the risks facing momentum ETFs, which automatically increase exposure to stocks with strong recent price performance. That strategy has worked exceptionally well during the AI-driven rally but can amplify losses when sentiment suddenly shifts.
History Suggests Rebounds After Momentum Crashes
Despite the sharp sell-off, Goldman’s historical data suggests major momentum unwinds have often created attractive entry points rather than signaling the end of the trade.
According to the bank, momentum declines of similar magnitude since 2006 were followed by average gains of 1.45% over the next week and nearly 23% over the following year. That could explain the climb that MTUM, PDP and QMOM are seeing on Friday, after declining between 1.5% and 3.5% on Thursday.
This could offer reassurance to investors in these funds, though near-term volatility may remain high if investors continue reducing exposure to crowded AI trades.
Photo: Shutterstock
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