S&P 500 rebounds 1% as Wall Street sees AI selloff as healthy correction

The S&P 500 rose 1% to 5,350 on Monday, recovering some of Friday's losses, as Wall Street strategists characterized the tech rout as a healthy correction in an overheated AI trade.

"The crowding in momentum strategies is at an all-time high on the long side while shorts remain underweight — that asymmetry creates a fragile setup," Lee Coppersmith, a trader at Goldman Sachs, said in a note to clients.

The Nasdaq 100 climbed 2.4% Monday after Friday's 4.8% slide, its worst session since 2020. The Philadelphia Stock Exchange Semiconductor Index had clocked its biggest drop in six years. Chipmakers led Monday's rebound, with Intel surging 11% after the Information reported Google placed an order for three million Tensor Processing Units, while Micron Technology gained 9% and KLA Corp and Applied Materials each rose more than 8%.

The question facing investors is whether Friday marked a one-day shakeout or the beginning of a broader unwind. With the Federal Reserve's next meeting on June 16-17 and the market pricing a 3% chance of a rate hike, the combination of extreme positioning and macro uncertainty leaves little room for error.

Goldman and Barclays Flag Structural Risks

Goldman Sachs data shows momentum strategy crowding on the long side has reached an all-time high, while short positioning remains underweight. This structural imbalance means any reversal in AI trade sentiment, Fed rate expectations, or inflation data could trigger unwinding far more violent than index-level volatility suggests, Coppersmith said.

Barclays global equity tactical strategy head Alexander Altmann warned that Friday's selloff may force volatility-control funds to cut equity exposure by about 14 percentage points — the largest single-day de-risking since Feb. 6. While some of that adjustment may have already occurred Friday, Altmann said such selling typically has a short-term lag effect that could pressure markets early this week. He described the current setup as "unusually asymmetric," with momentum trades facing "more violent liquidation risk once positioning starts to reverse."

JPMorgan's trading desk on Monday downgraded its near-term outlook on US stocks to "tactically cautious" from bullish, warning that investors may continue trimming recently surging tech names. Andrew Tyler, JPMorgan's head of global market intelligence, said the bank still sees merit in buying dips but recommended scaling in over weeks rather than all at once, citing bond market volatility, positioning unwinds, potential AI trade fading, and rising equity issuance.

AI IPO Wave Adds Supply Pressure

A separate structural challenge looms: a wave of companies seeking capital for AI expansion plans are preparing to list, creating a supply of new equity that is large by historical standards. This influx arrives just as positioning has become extreme, raising concerns among strategists that liquidity could be diverted from existing stocks — particularly with interest rates elevated and economic growth slowing.

The selloff reverberated globally. Japan's Nikkei 225 dropped 3.9%, its steepest decline since March, as AI-linked stocks like SoftBank Group and Kioxia Holdings fell more than 10%. The Shanghai Composite slid to a two-month low, closing down 1.7%, while the Euro Stoxx 50 touched a two-week low.

The 10-year US Treasury yield rose 1.8 basis points to 4.548%, touching a two-week high, after Friday's stronger-than-expected May nonfarm payrolls data bolstered speculation that the Fed's next move could be a rate increase. WTI crude oil rose more than 1% amid Middle East tensions before paring gains after Iran signaled an end to its current military operations against Israel.

This article is for informational purposes only and does not constitute investment advice.