Goldman Sachs is cautioning its most senior sales and trading clients that the AI momentum complex powering this decade's strongest market theme is exhibiting deep structural cracks, advising investors with related exposure to consider protective measures.

According to the latest report from Goldman strategist Guillaume Soria circulated to top clients, on September 15 the three-month momentum factor (GSPRHMO3) surged 5% in a single day while the 12-month momentum factor (GSPRHIMO) tumbled 6.7% on the same session—marking the widest daily performance spread in five years. Simultaneously, the Goldman AI theme basket (GSPUARTI) has now fallen roughly 45% from its peak, representing the most severe drawdown since the launch of ChatGPT. Goldman believes that if this trend persists, momentum factors will begin to decouple from the AI theme entirely.

On market implications, Goldman explicitly states that hedging momentum exposure "remains justified" in the near term, particularly given that momentum factor volatility is running significantly above broad index volatility—the S&P 500 fell less than 30 basis points that day while momentum factors churned violently internally. Goldman advises investors holding AI exposure to consider purchasing put options on the medium-term winners basket (GSXUHMOM) or the AI beneficiary basket (GSTMTAIP), with the one-month GSTMTAIP put at 95% strike priced at roughly 2.02% of notional over a 27-day tenor.

Historic divergence within momentum factors

The core warning in Goldman's report centers on the abnormal extremity of the performance gap between short-term and long-term momentum. The single-day spread between 12-month and three-month momentum now stands at its widest in five years, indicating that markets are rapidly abandoning prior long-term winners in favor of newly emerging short-term leaders.

From a positioning standpoint, momentum factor crowding has partially normalized—at the 41st percentile on a one-year lookback, notably lower than recent readings—but on a five-year basis, positioning remains elevated at the 88th percentile, suggesting systematic deleveraging pressure has not been fully exhausted.

Goldman points out that the correlation between momentum factors and the AI theme remains exceptionally high, holding between 90% and 96% across holding periods ranging from one month to one year. However, it is precisely this tight linkage that makes AI's sustained decline particularly impactful on momentum's structural integrity.

Capital rotation from semiconductors to software reshapes the landscape

Another significant development inside the momentum complex is the reversal of industry rotation direction. Short-term momentum is now exiting semiconductor names and rotating into software—a sector that was among the most disliked at the start of the year. Goldman data shows the software-versus-semiconductor relative performance gauge (GSPUSOSE) posted its second-best single-day reading on record.

Goldman believes this rotation has already spread from three-month momentum into six-month momentum, and if selling pressure persists, it is expected to propagate further into 12-month momentum. Looking ahead to the next momentum basket rebalance, Goldman anticipates increased software longs alongside short covering, combined with semiconductor reductions—a shift that would structurally re-engineer the composition of momentum factors.

Notably, software had previously been the highest-weighted sector in the 12-month momentum factor's short leg, meaning its rebound itself is amplifying the pressure on long-term momentum.

Goldman urges top clients to initiate hedges

The distribution scope of this warning itself transmits a signal. This Goldman report was not released through standard sell-side distribution channels but was instead sent directly to the bank's most senior sales and trading clients, with priority ranking well above conventional research dissemination.

In terms of specific actionable guidance, Goldman suggests that clients with AI exposure in their portfolios could consider hedging through put options on GSXUHMOM or GSTMTAIP. Using GSTMTAIP as an example, a one-month put at 95% strike carries an indicative cost of approximately 2.02% over a 27-day period, making the hedging expense relatively manageable.

Goldman further emphasizes that current momentum factor volatility has risen conspicuously relative to broad index volatility, and this divergence itself constitutes a rational basis for hedging. Against the backdrop of the S&P 500 falling less than 30 basis points on the day, the violent internal churning within momentum factors highlights their present fragility.