Goldman says rotation driven by positioning, not fundamentals

Investing.com -- Goldman Sachs said the recent market rotation appears to be driven by positioning rather than changes in fundamentals, as momentum stocks suffered one of their sharpest reversals in recent history.

The momentum pair fell about 8% since June 22 as investors moved out of the market's prior winners and into laggards. Goldman said the market became vulnerable to profit-taking after a strong first half as liquidity thinned into the summer.

The unwind has been concentrated in the AI complex, according to the bank. European Semiconductors dropped 12% from their June peak but remain up about 110% year-to-date, while Software rebounded about 5% over the same period despite still being down 23% year-to-date.

In Europe, the sectors most positively correlated with Momentum this year have been Hardware, Basic Resources, Telecoms, Utilities and Industrials, while Software, Consumer and Healthcare showed the most negative correlation. This mirrors Goldman's Capital Intensity framework, where asset-heavy companies benefit from strong demand linked to rising capital expenditure.

Goldman's HALO framework, which stands for Heavy Assets, Low Obsolescence, captured this shift, with the long Capital Intensive basket versus short Capital Light basket up about 20% year-to-date. The bank views the recent pullback as a tactical reset rather than the end of the theme.

Aerospace & Defence outperformed its factor-implied return since June 22, supported by strong earnings momentum, rising commitments with NATO 3.0, persistent geopolitical tensions, and strong government support particularly in Germany and the UK. Healthcare has also been resilient, helped by attractive valuations and defensive characteristics.

The Q2 reporting season will be the critical test, Goldman said. Consensus forecasts 11% year-on-year EPS growth in Europe, but excluding Commodity Producers, EPS growth is a more modest 6%. Strong earnings would support the view that the recent unwind is primarily a positioning reset.

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