The momentum unwind is not being driven by a broad equity-volatility shock. Equity volatility is currently subdued: the Cboe Volatility Index ended Friday near 16.8, comfortably below the 20 level commonly associated with elevated market stress. The S&P 500 also remains close to its highs despite severe damage within semiconductors, AI infrastructure and other crowded momentum trades. (Barron’s)
That distinction changes the analysis.
This is not primarily a market-wide risk-off event in which volatility-targeting strategies are being forced to liquidate the entire equity market. It is a concentrated positioning reset occurring beneath a relatively calm index surface. The ultimate pivot for Growth will not be a lower VIX. It will be a sustained decline in long-term nominal Treasury yields and, more importantly, real yields.
The momentum unwind may be approaching the end of its forced-liquidation phase. But the trade is unlikely to regain durable leadership until the discount-rate backdrop improves.
Low Index Volatility, High Factor Dislocation
The apparent contradiction between low equity volatility and violent momentum losses is one of the most important features of the current market.
Goldman Sachs reported that its high-beta momentum basket had fallen 32% from its high after being up more than 60% earlier in the summer. Its technology, media and telecommunications momentum pair had declined almost 40%, while the broader S&P 500 remained comparatively stable. Goldman also described single-stock volatility as exceptionally high even though index-level volatility remained contained and correlations between individual stocks had fallen to multiyear lows. (Goldman Sachs)
In practical terms, the losses have been concentrated in specific trades rather than distributed evenly across the market.
Funds that were long AI infrastructure, memory, semiconductors and technology hardware while short software, defensive equities and former laggards were hit on both sides. The crowded longs declined while the shorts rallied. That produced a momentum-factor crash without requiring a significant increase in broad-market volatility.
The equal-weight S&P 500 outperformed the capitalization-weighted index for six consecutive sessions through last Wednesday as leadership broadened beyond the largest technology companies. Earnings growth also accelerated for the median stock, reinforcing the rotation into Value, Quality and economically sensitive companies rather than signaling a general flight from equities.
The Hedge-Fund Liquidation Was a Clearing Event
Situational Awareness, the AI-focused hedge fund managed by former OpenAI researcher Leopold Aschenbrenner, became the clearest example of the leverage behind the momentum unwind.
The fund was not dissolved. It did, however, lose 67% of its portfolio value in July, unwind most of its publicly traded equity exposure, sell the bulk of its stock portfolio to Citadel and remove all leverage. The fund remained positive for the year because of extraordinary earlier gains, but its manager acknowledged that it had come dangerously close to permanent capital impairment. (Reuters)
This matters because the transaction potentially removed a large, price-insensitive seller from the market.
Before the portfolio transfer, declining prices could produce additional margin calls, which could force more selling, push prices down further and create another round of margin pressure. Once the positions moved to a stronger balance sheet and the fund eliminated leverage, that feedback loop weakened.
The liquidation can therefore be viewed as a technical clearing event. It may have marked the climax of the forced-selling phase, but it did not by itself create the conditions for sustained Growth leadership.
Removing a forced seller stabilizes supply. It does not lower the discount rate investors apply to future earnings.
Crowding Has Declined, but It Has Not Disappeared
The broader positioning data also suggest that substantial exposure has been removed.
Global semiconductor allocation among Goldman Sachs hedge-fund clients began the year near 10% of aggregate net equity exposure, rose as high as 24% in June and had declined to approximately 18% by late July. That represents considerable de-risking, but semiconductor exposure remained far above its beginning-of-year level. (Goldman Sachs)
Gross and net hedge-fund exposure tell a similar story. Both reached multiyear highs in early June. After the subsequent selling, they fell to approximately the 60th–65th percentiles of their three-year ranges—cleaner positioning, but not a complete washout. (Goldman Sachs)
The technical conclusion is therefore mixed:
The largest forced liquidation may have occurred.
Overall hedge-fund leverage has been reduced.
Semiconductor exposure is no longer at record levels.
But enough residual positioning remains to create additional selling if the macro backdrop continues moving against Growth.
That is why the next important signal must come from the Treasury market.
Real Yields Are the Actual Growth Constraint
The July movement in long-term interest rates explains why strong technology earnings have not yet produced a decisive return to Growth leadership.
The 10-year nominal Treasury yield rose from 4.48% on July 1 to 4.75% on July 31. The 30-year yield increased from 4.97% to 5.27%. Over the same period, the 10-year real yield rose from 2.25% to 2.47%, while the 30-year real yield increased from 2.78% to 3.03%. (U.S. Department of the Treasury)
That is a meaningful tightening in the long-term cost of capital.
Growth stocks derive a greater portion of their estimated value from earnings expected several years into the future. Higher real yields increase the rate at which those future cash flows are discounted. Even when revenue and earnings remain strong, investors become less willing to pay elevated valuation multiples for distant growth.
Value and Quality are generally less dependent on terminal-value assumptions. Their returns tend to be supported more heavily by current earnings, dividends, cash flow and tangible balance-sheet strength. That gives them a relative advantage when real yields are high or rising.
The momentum trade will therefore struggle to recover fully while the 10-year real yield remains near 2.5% and the 30-year real yield remains above 3%.
The First Possible Catalyst: Middle East Resolution
A credible resolution of the Middle East conflict could produce the fastest change in the rates backdrop.
President Trump has suspended another planned round of strikes while regional governments attempt to construct an agreement that would reopen the Strait of Hormuz. OPEC+ also approved a September production increase of approximately 188,000 barrels per day, completing the rollback of the voluntary production reductions initiated in 2023. (Reuters)
A durable reopening of the Strait would reduce the geopolitical premium embedded in oil, shipping and inflation expectations. Lower energy prices would improve household purchasing power, reduce pressure on corporate input costs and lessen the risk that the Federal Reserve needs to maintain or increase restrictive policy.
But the agreement is not complete. Iran has not clearly endorsed the proposed framework, control of shipping through the Strait remains disputed and previous ceasefires have broken down. The weekend developments are encouraging, but they are not yet sufficient to declare the energy shock over. (AP News)
There is also an important rates distinction.
A decline in oil prices that lowers only inflation breakevens would not necessarily help Growth. Real yields could remain high—or even rise—if nominal Treasury yields did not fall by at least as much.
The bullish Growth outcome requires conflict resolution to reduce both the inflation premium and the market’s required real return. Investors need to see nominal long-term yields and real yields move lower together.
The Second Catalyst: Confirmation That Core Inflation Is Tame
The June inflation report provided the first part of that argument.
Core PCE increased only 0.1% month over month, down from 0.3% in May. The year-over-year rate eased to 3.3% from 3.4%. That was a constructive reading because it suggested that underlying inflation had slowed even before receiving the full benefit of a potential decline in geopolitical energy pressure. (Reuters)
One month, however, does not establish a trend.
The Cleveland Fed’s July inflation nowcast projects core PCE growth of approximately 0.27% for the month and 3.31% year over year. That would be considerably less reassuring than June’s 0.1% monthly increase and would leave underlying inflation materially above the Federal Reserve’s target. (Cleveland Fed)
The market therefore needs confirmation from upcoming inflation releases that June was not an energy-driven anomaly.
The strongest Growth signal would be consecutive core inflation readings near 0.1%–0.2% month over month, accompanied by moderation in services inflation and no renewed acceleration in wages or housing-related components. That would reduce expectations for another Federal Reserve increase and allow the long end of the Treasury curve to price a less restrictive policy path.
Until that confirmation arrives, investors are likely to demand a higher real return for owning long-duration assets.
What Would Confirm the Momentum Unwind Is Ending?
The Citadel transaction may have removed the most visible forced seller, but the market needs several additional signals before declaring the reset complete.
Long-Term Yields Must Break Lower
A practical first confirmation would be a sustained move in the 10-year nominal yield back below approximately 4.60%, combined with a decline in the 10-year real yield below roughly 2.35%.
Those levels would reverse a meaningful portion of July’s rate increase. A one-day decline would not be sufficient; yields would need to remain lower as investors digest inflation data and geopolitical developments.
Growth Must Respond Positively to Lower Yields
The relationship between Growth stocks and rates must also normalize.
During the recent unwind, even strong company results were sometimes overwhelmed by positioning pressure and rising yields. The transition would become more credible if Information Technology and Communication Services begin outperforming on days when real yields decline—and retain those gains over subsequent sessions.
Former Leaders Must Hold Earnings Gains
Microsoft and Amazon demonstrated that cloud and AI demand remains strong, including accelerating cloud revenue, growing backlogs and expanding AI-related businesses. But the market is increasingly distinguishing between companies converting investment into revenue and companies merely increasing capital expenditures.
The unwind will be closer to completion when strong earnings produce durable advances rather than one- or two-day rebounds.
Breadth Should Remain Healthy
The most constructive outcome would not be a return to extremely narrow mega-cap leadership.
A sustainable Growth recovery should occur alongside continued participation from Financials, Industrials, Consumer Discretionary and other sectors with improving earnings. That would indicate that falling yields are easing valuation pressure without simultaneously signaling a severe economic downturn.
Implications for Sector ETF Investors
Information Technology: The sector offers the greatest upside if real yields turn lower. Profitable cloud, software, semiconductor-equipment and infrastructure companies should respond first. Until rates confirm the pivot, exposure should emphasize revenue conversion, free cash flow and balance-sheet strength.
Communication Services: Cash-generative digital platforms can participate in a falling-yield Growth rebound. Companies increasing AI spending without equivalent earnings visibility remain more vulnerable to further valuation compression.
Consumer Discretionary: Lower energy prices and lower long-term yields would improve the sector’s outlook through stronger purchasing power and reduced financing pressure. Amazon’s cloud results and resilient consumer-spending commentary provide fundamental support, but the sector remains sensitive to labor-market weakness.
Financials: Higher nominal yields, improving capital-market activity and broadening earnings currently support the sector. Financials may give back some relative leadership if the long end falls sharply, but moderate rate relief without recession would remain constructive.
Industrials: The sector continues to benefit from infrastructure, automation and capital-investment spending. Industrials provide cyclical earnings exposure without the same crowding and valuation risk found in the AI momentum complex.
Energy: Conflict resolution would weaken the near-term commodity-price case, although the sector would retain value as a geopolitical and inflation hedge until the Strait of Hormuz is demonstrably open and secure.
Quality: Quality remains the preferred bridge. It provides participation in profitable Growth while maintaining exposure to strong current cash flow, durable margins and balance-sheet resilience.
The Bottom Line
The momentum unwind is no longer primarily about equity volatility. Broad-market volatility is low, the S&P 500 remains resilient and the most severe dislocations are concentrated within crowded factor and single-stock positions.
The Situational Awareness liquidation may have marked the end of the most aggressive forced selling. Citadel’s purchase of the portfolio removed a major technical overhang, and hedge-fund exposure has already declined materially.
But the macro pivot has not happened.
Ten- and 30-year nominal yields ended July near their highs, while 10- and 30-year real yields rose significantly during the month. Those rates—not the VIX—are preventing Growth from regaining durable leadership.
The next decisive move will come from one of two places: a credible resolution of the Middle East conflict that lowers energy and policy risk, or repeated confirmation that core inflation has become tame enough to pull long-term real yields lower.
Until then, Value and Quality can continue to outperform even as selected Growth companies rebound. Once real yields turn, however, the combination of cleaner positioning, strong cloud earnings and reduced forced selling could produce a powerful Growth recovery.
The liquidation may have cleared the market. Lower real yields will determine when the momentum trade can lead again.
Sources
- U.S. Department of the Treasury: Daily nominal and real Treasury yield curves.
- Reuters: Situational Awareness hedge-fund liquidation and Citadel portfolio transaction.
- Goldman Sachs: Hedge-fund positioning, momentum drawdowns and AI-infrastructure exposure.
- Bureau of Economic Analysis / Reuters: June PCE inflation and consumer-spending data.
- Federal Reserve Bank of Cleveland: July inflation nowcast.
- Reuters: OPEC+ September production decision.
- Associated Press: Weekend Iran negotiations and suspension of planned U.S. strikes.
- Cboe / Barron’s: End-of-week VIX reading.
- StreetAccount and weekend market headlines: Earnings, positioning, Federal Reserve and geopolitical developments.
Disclaimer
This commentary is for informational purposes only and does not constitute investment advice, an offer to sell or a solicitation to purchase any security. ETF holdings, prices, factor exposures and market conditions can change. Investors should consider their objectives, risks, charges and expenses before investing.
