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In a report published on Wednesday morning, Goldman Sachs trader Guillaume Soria worried that the rotation of funds in U.S. stocks that occurred last week may indicate that the changing background may change the current momentum status quo, and now is the time to counter momentum.

Momentum means that what worked yesterday can still work today. Since the beginning of this year, the hot artificial intelligence (AI) concept has supported the momentum of US stocks to achieve the best performance in the same period of the previous year. Previously, momentum benefited from the background of the Fed's interest rate hike and was intertwined with the long-term themes that dominated the market.

Two consecutive weak CPI numbers and the resurgent possibility of a July rate cut suggest we may still be on track for a soft landing, while lower-quality, riskier assets that are part of the short-term momentum play may continue to outperform.

As markets repriced rate cuts, the likelihood of regime change in the US increased, and the concept of AI was re-evaluated, would what worked over the past six months still work?

After the release of the US CPI last Thursday, the rotation of betting on US stock market factors began, and this trend continued into this week.

Soria believes that given the change in market dynamics, it may be reasonable for investors to take profits on momentum gains as the U.S. stock rotation that Goldman Sachs pointed out last week continues, as evidenced by the worst five-day performance of large-cap stocks relative to small-cap stocks since 2020 as of Tuesday.

As of Tuesday, the five-day gap in large-cap stocks underperforming small-cap stocks was the largest so far in 2020 and exceeded 99% of the levels seen over the past decade.

Goldman Sachs' Barra Size index is neutral on sectors, industries and other factors.

From a size perspective, this is the largest size move in 15 years. If clients have profited from size trading and are concerned about the rate cut cycle, Goldman Sachs has a basket pair index to choose from, and can trade an item (GSP1SIZE Index) in Goldman Sachs swaps or options.

Although AI concept stocks are overvalued, the earnings forecasts for key stocks will not be announced on Thursday. Nvidia will only release its quarterly financial report on August 28. Moreover, there are currently no short-term catalysts. The US stock market may have room for a short-term correction, and the scale factor will perform poorly.

A basket of long-shorted and short-listed stocks tracked by Goldman Sachs shows that the market's most heavily shorted stocks are in the early stages of a rally due to a short squeeze.

Goldman Sachs' chart shows that momentum has so far been associated with long-term themes with large-cap stocks and strong balance sheet attributes. For public small companies, interest rates have been almost as important as growth since 2022, and it can be said that some growth issues are more priced than larger cyclical issues.

Soria recommends choosing some indicative options as a portfolio hedge for ongoing shifts in the short to medium term, such as the GSP1MOMO Index and the GSXUBFML Index on the momentum side, and the GSP1SIZE Index and the GSP1SIZE Index on the size side.