After weeks of heavy selling in artificial intelligence and semiconductor stocks, UBS believes the sharp momentum unwind could be approaching its final stages, potentially opening the door for investors to gradually rebuild positions in the sector.
The bank’s trading desk said hedge funds have already made one of the largest reductions in momentum and semiconductor exposure on record, suggesting much of the 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.
The 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 generally involves buying stocks that have recently outperformed while betting against the weakest performers.
Michael Romano, head of hedge fund equity derivative sales at UBS, said the latest positioning shift reflects 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’ momentum basket includes companies such as Sandisk, Broadcom, Oracle, KKR, Datadog and Microsoft.
According to Romano, positioning is increasingly becoming supportive of a rebound across these names as selling pressure begins to ease.
Rather than rushing back into AI names, however, UBS recommends investors slowly scale into positions as improving fundamentals begin to outweigh positioning-driven volatility.
AI fundamentals remain supportive
UBS argues that improving demand for artificial intelligence infrastructure continues to provide a constructive backdrop for semiconductor and software companies despite recent market volatility.
Romano expects the current momentum unwind to bottom out by the end of July, if it has not already done so.
He pointed to Friday’s sharp reversal in UBS’ 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 investor sentiment can shift once selling pressure subsides.
“I’d expect a liquidity bubble to the upside when things turn,” Romano wrote.
UBS also noted that its software basket has climbed roughly 20% since the end of June, underscoring how sensitive AI-related shares remain to changes in investor positioning.
Rotation could reverse
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.
Other Wall Street firms remain cautious
Not all strategists agree that the worst of the AI correction is over.
Goldman Sachs strategist Ben Snider said the recent selloff has renewed investor interest in investment themes outside artificial intelligence.
He noted that momentum strategies have erased all gains accumulated since late April, while volatility has climbed to the highest level recorded outside recession periods over the past 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.
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