After weeks of intense selling in artificial intelligence and semiconductor stocks, UBS has signaled that the momentum unwind may be approaching its final stages, potentially paving the way for a recovery in names like Broadcom, Sandisk, and Oracle. The bank's trading desk notes that hedge funds have executed one of the largest reductions in momentum and semiconductor exposure on record, suggesting the bulk of forced selling may already be behind the market.
According to UBS prime brokerage data cited by Bloomberg, hedge funds have unwound long positions in momentum and semiconductor stocks equivalent to roughly 5% of gross market value. This reduction ranks among the largest on record and has pushed net positioning in semiconductor and software companies back to levels last seen in April. Momentum investing, which involves buying recent outperformers and betting against laggards, has been particularly hard-hit.
Michael Romano, head of hedge fund equity derivative sales at UBS, described the positioning shift as a high-conviction de-risking process rather than a deterioration in the underlying outlook for AI. "The momentum de-risk was and remains a conviction call," Romano wrote in a note to clients. "Scaling into a position is prudent." UBS's momentum basket includes companies such as Sandisk, Broadcom, Oracle, KKR, Datadog, and Microsoft.
Romano believes positioning is increasingly supportive of a rebound across these names as selling pressure begins to ease. He recommends investors slowly scale into positions rather than rushing back into AI names, as improving fundamentals begin to outweigh positioning-driven volatility. The bank expects the current momentum unwind to bottom out by the end of July, if it has not already done so.
Romano pointed to Friday's sharp reversal in UBS's momentum gauge as an encouraging signal. The indicator swung from a loss of 3.5% to a gain of 2.5% within two hours, highlighting how quickly sentiment can shift once selling pressure subsides. "I'd expect a liquidity bubble to the upside when things turn," he wrote. UBS also noted that its software basket has climbed roughly 20% since the end of June, underscoring the sensitivity of AI-related shares to changes in investor positioning.
UBS argues that improving demand for AI infrastructure continues to provide a constructive backdrop for semiconductor and software companies despite recent volatility. The bank believes a recovery in AI and momentum stocks could come at the expense of sectors that have recently outperformed. Prime brokerage data suggest much of the buying seen in banks, industrial companies, and other cyclical sectors reflected short covering rather than fresh long-term investment. If investors rotate back into technology and AI, those recent market leaders could face renewed pressure.
However, not all Wall Street firms share UBS's optimism. Goldman Sachs strategist Ben Snider said the recent selloff has renewed investor interest in themes outside AI, noting that momentum strategies have erased all gains since late April and volatility has climbed to the highest level outside recession periods in 45 years. Unlike UBS, Snider believes history, investor positioning, and the lack of an immediate catalyst suggest AI infrastructure stocks could continue facing near-term headwinds.
Morgan Stanley has also argued that leadership in the broader equity market is expanding beyond technology. Equity strategist Michael Wilson said sectors such as consumer discretionary and transportation have outperformed the S&P 500 by around 12% over the past two months as earnings expectations improve. The contrasting views highlight an increasingly important debate on Wall Street: whether investors should use the recent correction in AI stocks as a buying opportunity or continue rotating into sectors benefiting from a broader economic recovery.
For investors tracking these developments, recent moves in Broadcom and Sandisk have shown signs of stabilization, while Oracle has hit a 52-week low amid broader AI funding concerns. The broader market's rotation away from AI has also been evident, as seen in the recent tech-led selloff.
This article is for informational purposes only and does not constitute financial advice.
