Goldman Sachs Trading Desk Analysis of the Recent AI Stock Decline: Impact of South Korean Stocks, Leveraged Products, and Month-End Rebalancing Pressure

According to Mars Finance, on June 24th, US tech stocks experienced a sharp decline, a rare occurrence this year. Goldman Sachs trading desk believes this was more like an orderly sell-off triggered by the South Korean market shock and amplified by leverage and capital flows. Ariana Contessa and Mike Washington of Goldman Sachs & Co. LLC FICC & Equities wrote in their June 24th MarketFeed that the South Korean KOSPI index fell by about 10% overnight, rapidly weakening risk appetite and carrying over into the US trading session. At the close of US trading, the S&P 500 fell 1.44%, the Nasdaq 100 fell 3.29%, the Russell 2000 fell 0.94%, and the Dow Jones was essentially flat. The tech-heavy Nasdaq recorded its third-largest single-day drop in the past year, and the Philadelphia Semiconductor Index fell nearly 8%. This sell-off was primarily concentrated in the semiconductor and memory sectors. Goldman Sachs stated that the South Korean market experienced a massive sell-off overnight, with foreign investors dumping over $2.5 billion worth of South Korean stocks, and record trading volumes for major leading stocks. SK Hynix saw a trading volume of approximately $26 billion, its highest nominal trading volume ever; 2x leveraged Hynix products traded approximately $3.5 billion, closing down 24%. This indicates that the decline was not solely due to fundamental concerns, but was also amplified by leveraged products and position adjustments. Goldman Sachs' trading desk also listed several additional pressures currently being traded in the market: concerns about recent financing and potential follow-on offerings, funding issues related to mega-cap tech stocks, individual company events, risk aversion ahead of Micron's earnings report, and rebalancing pressure from potential $40 billion in US pension fund sales at the end of the month. Goldman Sachs stated that this would be the largest month-end selling estimate ever in its model calculations. However, this was not a panic sell-off. Goldman Sachs reported an overall trading floor activity score of 5 out of 10. Asset management firms and hedge funds showed a clear sell bias, concentrated in technology and macro products, but the selling pressure was not overwhelming, and the overall sentiment was "orderly," without any overreaction or panic. ETF trading volume rose to 36% at the open, but remained far below the peak volatility in March, gradually declining throughout the day. The derivatives market showed investors increasing their protection. Goldman Sachs noted that the Nasdaq 100 volatility significantly outperformed the S&P 500, with the 1-month implied volatility spread relative to the S&P 500 exceeding 10 volatility points, placing it at the 99th percentile over the past year. The trading floor continued to favor using the QQQ put spread expiring at the end of the month as a hedging tool. Goldman Sachs' conclusions leaned more towards trading: Tuesday's tech stock decline was not caused by a single negative factor, but rather by a combination of factors including sharp fluctuations in the South Korean market, high concentration in the semiconductor and memory sectors, risk aversion in leveraged products, pre-earnings hedging, and end-of-month fund rebalancing. Market sentiment has clearly weakened, but judging from the trading flow, it is still an orderly risk reduction rather than a full-blown panic.