Goldman Sachs: July Shattered Crowded Trades; US Bull Market Intact but Harder to Navigate

US stocks in July resembled less of an index-level collapse and more of a position-level liquidation. The S&P 500 held its ground this week, with a fluctuation range of only 3.5% for the entire month of July, remaining less than 2% below its highs. More counterintuitively, the equal-weight S&P, low-volatility S&P, and the S&P 500 excluding AI all hit record highs this week.

Tony Pasquariello, head of hedge fund business at Goldman Sachs, wrote in his latest market observation: "After high-speed trading experienced a truly parabolic rise, a heavy hammer smashed through consensus positions over the past month; I am inclined to believe that this fever has cooled." The key point is not that risk has disappeared, but that the most crowded, convenient, and easily leveraged trades have been forced to cool down.

Surface calm coexists with underlying volatility. The S&P 500's average daily volatility this week was less than 1%, but the average daily volatility of Goldman Sachs' flagship momentum basket approached 10%. On June 22, the Goldman Sachs TMT Momentum Basket was still up 145% year-to-date, subsequently experiencing its worst drawdown on record, before rebounding 17% in a single day. Asia-focused fundamental long/short funds recorded historic performance in the first half of the year, only to suffer their largest single-month drawdown in the past decade, while the Korean KOSPI surged 18% overnight.

This framework leads to an uncomfortable conclusion: The outlook for the US stock market remains favorable, but risk-reward is no longer cheap, and the upside elasticity of global equities is weaker than before. The bull market has not been ruled out, but the next phase is not one of "buy and win effortlessly."

Indices Held Firm, But Crowded Trades Collapsed First

The easiest misjudgment in July was focusing solely on the S&P 500.

The index gave no panic signals. The S&P 500 remained less than 2% below its highs, with a July range of only 3.5%, appearing to be just normal oscillation. However, underlying active managers experienced a different market: hot momentum, AI supply chains, Korean stocks, and Asian long/short strategies were sequentially squeezed out of leverage.

The issue was not how much prices fell on any given day, but that the previously most profitable trades suddenly lost liquidity. Betting on the S&P 500 itself revealed stability; betting on high-momentum tech stocks revealed near-uncontrollable volatility.

The key divergence in July lies here: While the index level saw little turbulence, a batch of positions capsized at the portfolio level.

Deleveraging Was Not a Minor Adjustment, But a Real Purge

Several data points indicate that this round of deleveraging exceeded ordinary rebalancing.

Global tech exposure underwent its largest-scale sell-off in over five years. The assets under management (AUM) of Korean stock leveraged ETFs stood at $53 billion at the June peak and have now dropped to $15 billion. The total exposure reduction seen by Goldman Sachs' prime brokerage business was the largest since late 2022.

More granular position changes point in the same direction: Fundamental long/short clients' leveraged exposure to momentum factors has dropped to the 28th percentile of the past year's range. Crowded trades have shifted from "everyone is on board" to a situation where a significant portion has exited, often forcibly.

This does not mean painful trades will not return. However, compared to early July, the impulse to chase rallies in the market has significantly diminished, while cash holdings and discipline have significantly increased.

The Contradiction in AI Trades Shifted from Narrative to Returns

In the latter half of July, AI trades faced not simple profit-taking, but a more fundamental question: Can the massive AI capital expenditures by hyperscale cloud providers generate sufficiently clear and sustainable returns?

Skepticism regarding this question intensified last week. The answer provided this week was inconsistent but better than the most pessimistic scenarios.

Meta did not demonstrate that significant AI returns are already in hand; Microsoft provided clearer signals that capital expenditure is translating into revenue and AI products, and doing so at scale; Amazon subsequently reported accelerated AWS growth and expanded cloud business margins. Credit spreads on hyperscale cloud provider bonds narrowed synchronously.

These changes are important. If AI trades were left with only "huge investment, distant returns," valuations would face pressure; but if some companies can prove that investments are beginning to translate into revenue, the market will not treat the entire AI chain with a broad brush.

However, differentiation has emerged. The previous phase, where simply slapping an AI label could boost valuations, is at least less easy after this purge.

Fed Communication Turns Opaque, Long-End Rates Become a Stock Market Trouble Again

After the FOMC meeting, equity traders did not feel much relief. Volatility in the long end of the US Treasury curve briefly spilled over into the stock market.

More troublesome is the change in communication style. The market was accustomed to higher transparency in the past, but now seems to have entered a more restrained phase with fewer explicit cues. Traders must judge policy direction with fewer clues, which in itself creates friction.

What truly needs monitoring is the policy direction, not every wording choice. But for stocks, changes in long-end rates cannot be ignored, especially for long-duration stocks. Valuations for AI, tech, and growth stocks are more sensitive to far-end discount rates. Once the long end of the global bond market continues to exert pressure, a "stable base" does not guarantee daily comfort.

US Stocks Remain Favorable, But Upside Elasticity Has Thinned

From a broader framework, US stocks have not lost support. Economic performance is solid, earnings growth is strong, capital flows are expected to turn more positive, and nearly $1 trillion in AI capital expenditure is still flowing through the system.

This explains why the S&P 500 could hold firm despite severe underlying deleveraging. The index is not without risk, but there are simultaneously enough supporting factors providing a floor.

However, this is not a signal for aggressive bullishness. The direction for US stocks remains favorable, risk-reward is in the middle tier, and the elasticity for global stocks to continue rising significantly is not as strong as in the previous phase.

There will be more volatility in the short term. Summer liquidity is unfavorable for risk transfer; once certain positions become crowded, illiquid, and structurally complex, volatility will be amplified. At the portfolio level, it is more suitable to increase liquidity and reduce complexity rather than continuing to chase the steepest trades.

The Answer from the Nasdaq: The Bull Market Remains, But the Road Will Be Rough

The Nasdaq 100 Index has currently pulled back 8% from its June highs, but is still up 12% year-to-date. Over the past nine months, it declined in six months, yet still rose 9% point-to-point. The P/E ratio has fallen back to the lower end of the range seen in recent years.

These figures clearly describe the market state: The trend is not broken, but the process is difficult to endure.

For trading, the destination and the path are not the same thing. The main bull market line for the Nasdaq remains, but if the future rhythm continues to be "rise for a stretch, smash a round of positions, then repair," making money will be harder than just getting the direction right. July has already served as a reminder: The market does not reward crowded trades, nor does it forgive leverage.