Hedge funds just did something they have never done before, at least since Goldman Sachs started keeping track more than a decade ago.
Over the last two months, hedge funds reduced their US technology stock holdings at an unprecedented rate.
To put that in perspective, the S&P 500 Information Technology Index dropped roughly the same amount - also about 10% - since early June.
Goldman's prime brokerage desk, the unit that tracks what big hedge fund clients are doing, reported the numbers. The firm's prime brokerage team described it this way: "Amid continued volatility and sharp selloff across the semis/memory/AI infrastructure complex, the persistence and magnitude of selling since early June point to significant length reduction by tech investors, and some signs of capitulation are starting to emerge."
This pullback marks a sharp reversal from the tech sector's outperformance earlier this year, when AI-related stocks soared on optimism about transformative technologies. The rotation into consumer stocks suggests hedge funds are seeking safer bets amid uncertainty about the sustainability of AI spending.
The big question is why. After all, tech stocks - especially anything tied to artificial intelligence - have been the market's favorite story for a while.
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The answer comes down to doubt. Investors have been taking profits, sure. But they are also growing more skeptical that AI-related stocks can keep their valuations as worries grow that major technology firms might reduce their heavy investment spending on AI.
According to Goldman, tech stocks performed the worst last week and were the most heavily net sold US sector, with long positions reduced and short bets increased. The majority of sub-industries experienced net selling, with the biggest sales in technology hardware, storage, peripherals, and IT services, while semiconductors and software saw less activity.
Goldman strategist Ben Snider summed up the shift. He said the "painful volatility in popular AI infrastructure stocks" has renewed interest in other sectors.
Snider and his team expect the pain to keep going, at least in the near term. They see "continued near-term challenges" for the AI infrastructure momentum trade - the stocks that build the data centers, chips, and networking gear that power artificial intelligence.
Here is the twist. Snider also said the fundamentals remain solid. He said: "History, positioning, and lack of a favorable catalyst point to continued near-term challenges for the AI infrastructure Momentum trade despite solid fundamentals."
The problem is not the businesses themselves. It is the mood around them.
When hedge funds sell this hard and this fast, it creates a self-reinforcing cycle. Prices drop. More funds sell to protect their returns.
The selling picks up speed. That is what the Goldman team means when they talk about "capitulation" - a point where holders give up and dump their shares, often near the bottom.
If you own tech stocks or an index fund heavy on them, this news matters. Hedge fund selling does not always predict where the market goes next, but it is a strong signal that some of the smartest money around is betting on more pain.
The good news is that the fundamentals are still there. AI spending is not going away overnight. The biggest companies are still pouring billions into data centers. But the market is asking a tougher question now: Are those stocks worth the prices they reached?
The next few weeks could be choppy. Goldman expects the selloff to continue until something changes - either a new catalyst appears or enough selling has happened that prices become attractive again. For regular investors, the lesson might be to watch the AI hype with a healthy dose of skepticism. When even hedge funds are running for the exits, it pays to ask what they see that the rest of the market might not.
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