Something unusual is happening beneath the surface of the S&P 500. While the equal-weight index keeps printing new highs, the stocks inside it are moving less in sync than at any point in modern market history.
Goldman Sachs equity strategist Ben Snider flagged the divergence in a July 17 research note, highlighting that the three-month implied average stock correlation across the S&P 500 has fallen to a record low of 0.14. For context, a correlation of 1.0 means every stock moves in lockstep. A reading of 0.14 means the index’s components are essentially doing their own thing.
AI momentum is breaking down
The catalyst is a violent rotation away from AI-related trades. After months of AI-themed stocks juicing broader market returns earlier in 2026, the trade has reversed sharply in July. Capital expenditure concerns and sector rotation triggered steep pullbacks among the most popular AI momentum names.
Goldman’s Momentum factor, which tracks the performance of stocks with the strongest recent price trends, saw its annualized volatility spike to 36% over the trailing three months. That’s the highest reading outside of a recession in 45 years. The correlation between Goldman’s AI basket and the S&P 500 AI index has turned negative, meaning the two groups are now moving in opposite directions.
Hedge funds are accelerating the dislocation. Goldman Prime Insights commentary from late July described a broad “de-grossing” across the hedge fund community, with managers cutting their AI exposure in a coordinated retreat from the trade that defined the first half of the year.
Goldman’s alternative playbook
With AI momentum trades now acting like a different asset class entirely, Snider’s note offered three non-AI investment themes for clients looking to sidestep the carnage: consumer experience stocks, compounders, and M&A candidates.
The common thread is that all three baskets show minimal correlation to Goldman’s AI stock baskets and the broader Momentum factor. In a market where the average stock correlation is at historic lows, that independence is the point.
What the correlation collapse means for investors
For passive index investors, the number is mostly noise. The S&P 500’s headline performance can remain stable even when its components are flying in different directions, because big moves in one group tend to offset big moves in another. The equal-weight S&P 500 hitting new highs suggests the median stock is doing fine.
The risk sits squarely with momentum-oriented strategies and funds with concentrated AI exposure. A 36% annualized volatility reading on the Momentum factor means that a strategy built around buying recent winners and selling recent losers is experiencing drawdowns typically associated with economic recessions. Except this time the economy isn’t in recession, making the whiplash harder to model and harder to hedge.
The hedge fund de-grossing trend adds a feedback loop. As funds sell their AI positions, prices drop, correlations fall further, and the remaining holders face more pressure to cut. This dynamic can persist for weeks or even months, particularly when the initial positioning was as crowded as AI trades became in the first half of 2026.
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