U.S. equity markets ended October under pressure as a sharp reversal in technology and semiconductor shares triggered a series of volatility signals that Goldman Sachs derivatives strategist Brian Garrett described as signs of market 'repair.' Garrett's assessment points to a market that has begun resetting stretched positions and valuations, yet may remain vulnerable to further deleveraging into 2026.
The Nasdaq 100 fell about 7% during October, according to Garrett, marking its second-worst monthly performance since the artificial-intelligence-driven equity rally began in 2023. It was also the index's third pullback this year. The S&P 500, by comparison, slipped 0.6% during the latest week to finish at 7,580, leaving it roughly 3% below its record high.
The gap between those headline losses and the stress visible beneath the surface is central to the current market picture. Goldman Sachs Prime Brokerage data showed U.S. fundamental long-short hedge fund net leverage had dropped to 47%, placing it in the seventh percentile of the previous year. Garrett said positioning had reached levels that have historically appeared during drawdowns exceeding 20%, even though the S&P 500's decline from its peak remained comparatively modest.
Semiconductor shares absorb the first shock
Chipmakers bore the brunt of the selling. Semiconductor stocks fell between 7% and 8% in a single session, a move Garrett said ranked among the three largest one-day relative declines for the group in more than 15 years.
The Philadelphia Semiconductor Index also broke below its 200-day moving average after remaining above that trend line for 355 consecutive trading sessions. The index then moved toward its July low, putting a technical marker on a decline that had previously been concentrated in a relatively small group of AI-linked companies.
The sell-off followed an earnings period in which several large technology and software names suffered unusually severe post-results reactions. ServiceNow shares fell 25% in one day, while Intel and Reddit each declined 30%, according to the figures cited by Garrett. F5 dropped 20%. Such reactions can force funds to reduce exposure quickly because losses in crowded long positions often coincide with rising volatility and reduced appetite for leverage.
Valuations in semiconductors have already moved lower. Garrett said the sector's forward price-to-earnings multiple had fallen to roughly 16 times expected earnings, the lowest level of the current AI cycle. That reset gives the group a less demanding valuation than it carried earlier in the rally, though lower multiples alone do not prevent additional declines if earnings expectations weaken or funds continue cutting risk.
Volatility catches up with single-stock stress
Options activity indicated that index markets were beginning to reflect stress that had first surfaced in individual shares and credit instruments. One-month implied volatility on the Nasdaq 100 rose by nearly two volatility points in one session, Garrett said. VVIX, an index measuring expected volatility in the VIX itself, reached an intraday high of 124 before easing.
U.S. equity options volume approached 100 million contracts in a day, the fourth-highest total on record in Garrett's data. The activity came as traders used options to manage increasingly abrupt moves in stocks, particularly around earnings announcements.
Short-dated option prices did not fully keep pace with the realized intraday swings. A straddle designed to capture movement in the S&P 500 through Apple's earnings and the U.S. midterm election was priced for a 150-basis-point move, Garrett said. That was below the 180-basis-point decline the index recorded in a single session.
By year-end, options implied moves of plus or minus 5.1% for the S&P 500, 7.8% for the Nasdaq 100 and 6.3% for the Russell 2000. Those levels suggest traders expected volatility to persist, with the technology-heavy Nasdaq retaining the widest anticipated range.
A rebound driven largely by short covering
Goldman Sachs Prime Brokerage recorded hedge funds as net buyers of U.S. equities for the first time in four weeks, a move equivalent to 1.1 standard deviations. Yet the composition of that buying offered a restrained signal of confidence: 73% came through macro products and was dominated by short covering.
Short covering occurs when traders who had bet on falling prices buy assets to close those positions. It can produce sharp rallies without representing fresh conviction in the underlying market. U.S.-listed ETF short interest fell 4.8% during the week, Goldman's data showed, the largest weekly reduction in more than six months. Technology, large-cap equity and credit ETFs led the covering.
Technology buying also remained limited relative to the preceding liquidation. Demand during the week amounted to around 40% of the technology-sector selling seen over the previous three weeks as of Thursday, Garrett said. The 'Magnificent Seven' stocks recorded net selling in four of five sessions, while long exposure to that group remained near year-to-date highs.
That combination leaves the market susceptible to renewed selling if economic data, Treasury financing plans or corporate guidance disappoint. A fund that has covered a short position has removed a bearish trade; it has not necessarily added a durable long position.
Breadth improves while AI leadership weakens
Market breadth offered a more constructive counterpoint. In one session, 406 S&P 500 companies finished higher even as the index closed lower. Garrett characterized the pattern, roughly 80% of constituents rising while the benchmark declined, as rare.
The apparent contradiction reflects the continuing influence of a handful of large technology stocks on the capitalization-weighted S&P 500. Losses among those companies can outweigh gains across much of the rest of the index.
Garrett said an S&P 500 measure excluding AI-linked shares was on course for its strongest monthly result since 2022. The divergence suggests money has been rotating away from the AI winners that led the earlier advance and toward other areas of the market, rather than leaving equities altogether.
The rotation has also appeared in rates. Over two weeks, the iShares 20+ Year Treasury Bond ETF, known as TLT, showed a correlation of about minus 0.7 with a basket of AI winners, according to Garrett. Long-duration Treasuries and AI shares have therefore moved in opposite directions, an indication that changing rate expectations and reassessments of high-growth valuations are interacting.
Implications for crypto market risk
Digital-asset traders should watch the technology-led equity correction because Bitcoin and major crypto assets often trade as high-beta risk assets during broad deleveraging episodes. The supplied market analysis cited a 90-day correlation near 0.37 between technology shares and the largest digital asset, a relationship that can tighten during sudden equity sell-offs.
The equity market's message is less about a single economic outcome than about positioning. Hedge fund leverage has fallen, short positions have been covered, and semiconductor valuations have reset, but Garrett's warning that deleveraging may extend into 2026 leaves open the prospect of further forced selling.
For crypto markets, where derivatives can amplify price moves and liquidity can thin rapidly during risk-off sessions, the most relevant external indicators will be the stability of technology shares, index volatility and credit conditions. A sustained recovery in equity breadth could reduce pressure on risk assets, while another break lower in semiconductor and mega-cap technology stocks would likely keep cross-market volatility elevated.
Concerned about equity turbulence through 2026? Deepen your macro perspective with our concise guide on fiscal policy.
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