The Shakeout AI Investors Were Waiting For

AI darlings took a beating last month...

From August 6 to 19, a brutal sell-off hit some of the market's favorite stocks. High-flying names like Palantir Technologies (PLTR), Advanced Micro Devices (AMD), and Super Micro Computer (SMCI) lost between 6% and 12% in market capitalization.

On the surface, it looked like another momentum trade unraveling... a sharp rotation out of the year's biggest winners.

But beneath the panic, something else was happening. The Goldman Sachs (GS) trading desk spotted a pattern...

Goldman's High Beta Momentum Basket – a collection of stocks with the strongest recent gains – fell 13% in less than two weeks.

That kind of drop doesn't happen often. But when it does, the results are surprisingly consistent.

Since 1999, every time the basket fell more than 10%, the median return over the next month was a gain of 11%.

Goldman says these kinds of shakeouts often mark the start of new legs higher... not the end. And based on history, we agree.

Big winners tend to stay winners during bull runs...

Momentum dislocations aren't rare, especially in fast-moving bull markets.

In fact, they tend to happen because prices run up so fast. Investors take profits, rotate into laggards, or panic when disappointing news or a short report hits.

That's exactly what triggered the August AI slide. A widely circulated MIT paper claimed that only 5% of generative AI pilot projects are making a profit.

The media latched onto it. And the market overreacted, as usual.

But if this were the end of the AI trade, we'd expect leadership to disappear. Instead, early signs suggest the opposite...

This recent sell-off looks almost identical to short pullbacks in past bull markets... especially the dot-com rally of the late 1990s.

Back then, chips, enterprise software, and hardware names dominated the leaderboard...

They sold off first and hardest during corrections... only to lead the next push higher.

We took a closer look at stock market leadership during the dot-com boom. Specifically, we analyzed S&P 500 companies... with a special emphasis on the top 100 performing large-cap tech stocks. We focused on pullbacks and rallies between 1994 and 1999.

Across seven major run-ups, 14 of the same stocks consistently ranked in the top 10%. Even more telling, eight of them appeared in the top 10 in at least three separate rallies.

Said another way, leadership persisted across different pullbacks and rallies.

And that same persistence may already be unfolding in 2025. Goldman looks at the 200-day moving average (200-DMA)... the rolling average of the past 200 daily closes.

If a basket's average share prices are at or above the 200-DMA, Goldman says, we're likely looking at a near-term rally.

At the end of August, Goldman's High Beta Momentum Basket was hovering just above that level... setting the stage for a bounce back.

Shakeouts are part of every bull market...

But history shows they don't break leadership. They reinforce it.

The recent AI pullback mirrors what we've seen across other explosive growth cycles. Winners consolidate, traders rotate, and headlines drive temporary fear.

But when the dust settles, the same companies keep pushing forward.

AI stocks are volatile. There's no denying that. But they're also where future gains are concentrating.

My team and I have been studying past (and current) market leadership for months. And I believe what we've found could be the single greatest moneymaking anomaly in the U.S. stock market...

This strange anomaly caused 300 stocks to double since the bottom in April (when tariff panic briefly sent the S&P 500 down 19%).

In fact, some of history's greatest investors – like George Soros, Jack Dreyfus, and Richard Driehaus – have built their enormous wealth thanks in part to this strategy.

But to take full advantage, you must understand the massive market shakeup that could unfold before earnings season starts in just a few weeks. Learn more here.

Smart investors don't chase every spike or dip. They study what leadership looks like... and follow the patterns that history has proved.

This dip is when the next phase of momentum starts to take shape. Don't miss out.

Regards,

Joel Litman
September 19, 2025