The Most Brutal High Beta Momentum Sell-Off Ever Recorded?

The market is currently experiencing what looks like the worst high beta momentum stock sell-off ever recorded. Worse than the Great Financial Crisis, the tariff tantrum, COVID, and the dot-com bubble. That statement alone sounds almost impossible, but the data behind this move is genuinely difficult to comprehend. I don't think there are many words that can properly describe how extreme and unusual this sell-off has been. This started happening at the end of June and has continued with relentless selling pressure across high beta and momentum stocks. What makes this even more interesting is that there isn't one clear fundamental reason that explains the magnitude of this move. Yes, the Iran deal fell through, although that was not exactly unexpected. Rate hikes are still a possibility this year. The Iran conflict doesn't appear to be ending anytime soon, and historically this is one of the weakest periods for equities during a presidential midterm cycle. However, none of these factors explain why high beta stocks are being punished more aggressively than during periods like the dot-com bubble. The Goldman Sachs High Beta Momentum Index was down approximately 27% month-to-date through the first half of July, representing its worst performance since inception. The Morgan Stanley Tech Momentum Index 17-day rate of change fell 38%, the worst reading ever recorded throughout its 27-year history. What we are seeing is truly unprecedented. It almost feels like something much bigger is happening somewhere that the general market does not fully understand yet. There have been multiple reports of institutional fund managers, including people at major firms such as Citadel, Goldman Sachs, and Morgan Stanley, suffering massive losses this month due to positioning around AI and software. The popular trade throughout this year was going heavily long AI, semiconductors, and infrastructure while shorting software as a hedge. For roughly six months, this strategy worked extremely well. That trade has now completely reversed. Many investors who were positioned this way have been caught on the wrong side of the market, with some reportedly suffering hundreds of millions in losses. The exact scale of the damage is difficult to know, but the unwind has clearly been violent. This is one of the most brutal momentum breakdowns ever seen, especially considering there has been very little dislocation in the broader indexes. That is what makes this situation so fascinating. S&P 500, and other major indexes are relatively close to all-time highs, while hundreds of individual high-growth companies have experienced 40-70% declines. The risk/reward setup at this point looks more attractive than it has in years. Yes, many of these high beta stocks went up vertically over the past few years, especially during the last 12 months. Some companies absolutely deserved a correction. Some valuations became stretched, and some investors became overly optimistic. But this is different. This is not a normal valuation reset happening in isolated companies.This is happening across almost everything in high beta growth. Fundamentals, earnings, guidance, projections, partnerships, and company-specific news have almost completely been ignored. Companies can release positive updates, beat expectations, announce major contracts, and still get aggressively sold. Hundreds of popular retail stocks have been crushed. Some are falling 5-15% every few days with little or no negative news. It almost feels like the market is pricing in that AI is over before the buildout has even truly started. Meanwhile, the largest companies in the world continue to signal the complete opposite. The hyperscalers are still guiding toward approximately $1.4 trillion in cumulative AI-related capital expenditures through 2028. Morgan Stanley recently increased its estimates for 2027 and 2028 capex by around 9-10%. Micron's entire HBM4 supply for 2026 is already sold out through long-term contracts. Nebius has secured billions in commitments, including approximately $12 billion from Meta and $17.4 billion from Microsoft. None of those contracts changed because a momentum index suddenly dropped 35%. The fundamentals behind the AI infrastructure buildout have not disappeared. We are still in the early innings of what could become one of the largest infrastructure expansions in history. Microsoft, Meta, Google, Amazon and many other companies have only recently started aggressively increasing their capital expenditures. Their actions suggest they believe this buildout will continue for years, potentially through atleast 2030. Eventually, maintenance mode will arrive. Eventually, the massive capex cycle will slow down. But that does not appear likely until at least the end of 2027 or early 2028. We have not even seen the full return on investment from the current AI infrastructure spending. Companies are spending hundreds of billions of dollars because they believe the future returns justify sacrificing near-term free cash flow. Companies like Nebius, CoreWeave, and other AI infrastructure providers are expected to scale dramatically over the coming years. Many are attempting to grow from hundreds of millions in revenue into multi-billion-dollar revenue businesses. These are not just random speculative companies. Many are positioned directly within the infrastructure layer of one of the largest technological shifts in decades. ASML and TSMC have continued reporting record earnings with no obvious signs of slowing down. Yet despite this, many companies connected to AI infrastructure have experienced extreme drawdowns over only a few weeks. Some examples: $NBIS down 40% from ATH ($300 -> $170) $AAOI down 55% from ATH ($223 -> $98) $SIVE down 80% from ATH (110 SEK -> 35 SEK) $LITE down 33% from ATH ($1,050 -> $706) $RKLB down 55% from ATH ($150 -> $67) $MU down 30% from ATH ($1,200 -> $853) $SNDK down 40% from ATH ($2,335 -> $1,411) $ASTS down 55% from ATH ($135 -> $54) $CRWV down 60% from ATH ($185 -> $72) $IREN down 55% from ATH ($74 -> $34) $MRVL down 45% from ATH ($330 -> $184) $APLD down 50% from ATH ($51 -> $26) $NOK down 40% from ATH ($17.50 -> $10) $ONDS down 50% from ATH ($13.50 -> $6.50) If you are an aggressive growth investor, your portfolio has probably been destroyed during this period. There are many more retail-favorite stocks that have been cut in half during this bloodbath over the past 4-6 weeks. July has historically been one of the worst months for momentum stocks, with the last 10 years all showing negative performance for momentum during July. So the seasonal weakness itself was not completely unexpected. However, the magnitude of this sell-off is what makes it so unusual. The level of forced selling we are seeing is difficult to comprehend. When you look at the leverage and margin activity that has built up, especially in South Korea, it becomes even more extreme. Approximately 1.2 million retail traders received margin calls this week, representing around 3.4% of South Korea's entire adult population. Reports indicate that around 500,000 people in South Korea have been liquidated over the past two weeks alone due to the volatility in the KOSPI index and major components such as SK Hynix and Samsung. On top of this, the Nasdaq 100 is potentially heading toward its worst July performance in over two decades. A lot of people are calling memory a cyclical industry. I don't necessarily disagree with that. Historically, memory has always been cyclical, and the industry has gone through multiple boom-and-bust cycles caused by oversupply and shortages. However, this time there is a major difference. It is almost impossible to fully calculate how this AI revolution will develop over the next 5-10 years. The current buildout is not something designed around only the next year or two. The amount of capital being deployed, the long-term contracts being signed, and the infrastructure being built point toward a much longer timeframe. Many of these companies are planning around a future that extends well into the next decade. Micron is currently trading below 5x projected 2027 earnings. SK Hynix is trading below 4x projected 2027 earnings. That is difficult to comprehend considering the demand environment and the number of long-term agreements continuing to be signed. I understand the argument that memory companies historically become cheap near the top of cycles. Buying low P/E companies can sometimes be a value trap because earnings are temporarily inflated. But this situation is different from previous cycles because the demand driver is not simply a traditional memory cycle. The question is how large the AI infrastructure buildout becomes. There is no clear evidence yet that the earnings power of these companies is about to collapse. The more likely explanation for the severity of this sell-off is the amount of leverage, margin, and positioning that built up during the bull market. There has never been this much margin debt and leverage in the market. Before the 2022 bear market, Korean margin loans peaked around 25 trillion won, approximately $17 billion. During this bull market, Korean margin loans reached around 40 trillion won, approximately $27 billion. That is an enormous increase considering we are talking about South Korea, not the United States. The situation in the US is even larger. Before the 2022 bear market, FINRA margin debt peaked around $900 billion. Today, FINRA margin debt is approximately $1.4 trillion. That amount of leverage becomes extremely dangerous when the stocks people are using leverage on fall 40-70%. Most people are not using large amounts of margin to buy companies like Microsoft, Apple, or other mega-cap companies. They are often using leverage on higher-risk growth stocks such as Nebius, Rocket Lab, CoreWeave, and similar names. When these stocks experience massive drawdowns, forced selling accelerates. Margin calls happen. Stop losses trigger. People panic. The selling pressure becomes much larger than what fundamentals alone would justify. At this point, the healthiest outcome would probably be for the market to completely flush out excessive leverage and weak hands so a new, healthier, and more sustainable rally can begin. Personally, I believe we are getting closer to a bottom. One interesting signal is how quiet people have become. The same people who were extremely active on X, Reddit, and other platforms during the rally have largely disappeared. When you look through individual stock communities, the sentiment has completely changed. People sound defeated. Many investors have lost significant amounts of money. When you see one of the worst high beta momentum crashes ever recorded, but without a major financial crisis, bubble collapse, or fundamental breakdown behind it, it becomes difficult to believe there will not eventually be a strong recovery. Even if the first move higher is only a temporary relief rally or dead cat bounce. Another fascinating statistic is that approximately 42.5% of US-listed stocks with a market capitalization above $300 million are down 20% or more from their 52-week highs. At the same time, every major index S&P 500, Nasdaq 100, Russell 2000, and NYSE Composite remains within roughly 1-5.5% of all-time highs. The market is extremely divided. Equal-weight indexes such as RSP and QQQE have actually held up better than their market-cap-weighted counterparts like SPY and QQQ. It is genuinely difficult to understand how the S&P 500 can be barely below highs while so many individual stocks have been destroyed. However, once you look at the massive rotation happening, it starts to make more sense. Micron fell 30%. Meta rallied 30%. The same thing happened with Amazon, Nvidia, Apple, and Microsoft, which all recovered significantly from their lows. Capital has not necessarily left the market completely. It has rotated. The biggest issue right now is that with Trump as president, it becomes much harder to have confidence in a smooth recovery. Inflation had finally started moving lower after the Iran conflict began calming down. Now the market is once again pricing in possible rate hikes because of renewed inflation concerns, mainly due to energy prices and uncertainty around oil flows through the Strait of Hormuz. The policy decisions being made create additional uncertainty at exactly the wrong time. The frustrating part is that this is happening before the midterm elections. Higher inflation, rising gas prices, and increasing costs of living are historically very unpopular with voters. Watching these developments from Norway, it is difficult to understand the political calculation behind some of these decisions. Regardless of politics, the larger investment argument remains the same. Many AI-related companies have barely begun their expected ramp-up. The next 6-12 quarters could still show significant earnings growth. Nvidia and Meta are trading at some of their lowest valuations compared to the last five years. Yes, there are legitimate criticisms of Zuckerberg and Meta's AI spending. The company previously invested heavily into the metaverse without delivering the expected results, and investors have questioned whether the current AI capex will generate sufficient returns. However, Meta has provided a clearer vision recently, which is one reason the stock has responded so strongly. The majority of the Mag 7 companies have accelerated again over recent quarters and are showing some of their strongest growth rates in years. The short-term concern is obvious: free cash flow has deteriorated significantly because of massive AI spending. But these companies clearly believe the opportunity ahead justifies the investment. These are the largest companies in the world. They have access to some of the smartest engineers, researchers, and executives on the planet. They would not sacrifice hundreds of billions in free cash flow if they did not believe there was a massive opportunity on the other side. This is the largest infrastructure buildout in modern history. Companies either adapt to this technological shift or risk falling behind. My conclusion is that this sell-off appears primarily driven by margin, leverage, and forced selling rather than a complete deterioration of fundamentals. The market needs to flush out excessive speculation before a healthier recovery can begin. This is one of the largest infrastructure transformations ever, with the world's biggest companies aggressively increasing capital expenditure while accepting lower near-term free cash flow. Many of these companies are still in the early stages of the buildout. Maintenance mode will eventually arrive, but that likely does not happen for another several quarters. Memory companies also do not appear to have reached a traditional cycle peak considering the continued demand, contracts, and investments being announced. AI infrastructure, photonics, and emerging cloud providers have barely demonstrated what their future scale could become. Some of these companies are attempting to go from hundreds of millions in revenue to billions and eventually tens of billions over the next several years. There are many signs that this momentum collapse could be approaching an end. The magnitude of this decline is too significant for institutions not to eventually step in. Many professional investors are also suffering because strategies that worked for months being long AI and semiconductors while shorting software have suddenly reversed. The fundamentals continue improving. Earnings continue reaching records. The AI infrastructure cycle appears far from finished. The phrase "this time is different" is usually dangerous in investing, but in this case, completely dismissing the possibility of a new type of cycle may also be a mistake. Nobody truly knows how this AI buildout will develop over the next decade. The frustrating part from my perspective is that I currently have almost no dry powder left. I have been buying dips repeatedly for nearly a month, and the market has continued creating new opportunities every few days. I am also in the process of selling a house, so hopefully that happens quickly and allows me to deploy a significant cash position. For now, I am interested in hearing everyone's thoughts. What are you doing during this sell-off? Do you believe this is primarily a leverage-driven liquidation event, or do you think the market is starting to price in something more fundamental? Would appreciate to hear your opinions on the points discussed above.