Everyone is a Genius in a Bull Market
As summer 2026 approached, everything on Wall Street seemed to be flashing a green light for bulls. On the geopolitical front, the U.S. and Iran had signed a “memorandum of understanding.” Meanwhile, the artificial intelligence revolution caught fire. Big tech hyperscalers such as Meta Platforms (META) and Alphabet (GOOGL) were spending hundreds of billions of dollars on AI infrastructure with plans to spend more. As a result, semiconductor and AI-related stocks caught fire. For instance, at its peak, SanDisk (SNDK) was up nearly 900% in 2026 alone!
Image Source: Zacks Investment Research
However, as has been the case throughout history, investors get greedy in bull markets, causing stocks to overshoot.
Overleverage Leads to Overshooting in Both Directions
“There are only three ways a smart person can go broke: liquor, ladies, and leverage.” ~Charlie Munger
The recent bull market was intensified by extreme leverage. Because of its high concentration of AI exposure, the South Korean stock market (KOSPI), home to AI tech leaders like SK Hynix (SKHY), has been the poster child of the recent AI run. In May 2026, South Korean regulators approved 2x leveraged ETFs tracking the country’s top tech giants. As the Korean stock market continued to soar, retail investors piled ~$10 billion into these leveraged ETFs alone. Meanwhile, Leopold Aschenbrenner, a former OpenAI employee turned AI guru, founded an AI-focused hedge fund named Situational Awareness. According to reports, the multi-billion-dollar fund was up more than 400% in the first few months of 2026 thanks to being in the right stocks and extreme leverage.
However, in July, the AI trade unwound violently after a Beijing-based start-up, Moonshot AI, released a flagship AI model, Kimi K3. Studies show that Kimi K3 is one of the most efficient AI models ever released, and its performance is said to be near or on par with top U.S. AI models. The Kimi K3 release sent shockwaves through Wall Street as investors worried that the billions in hyperscaler AI infrastructure would go to waste and that less AI infrastructure would be needed.
Margin Washouts are a Necessary Evil
This week, it became clear that the massive destruction in AI-related stocks was likely a product of forced selling. According to Goldman Sachs (GS), more than 1.2 million leveraged retail trading accounts in South Korea triggered margin calls (~3.4% of the adult population). Meanwhile, news broke that star AI investor Leopold Aschenbrenner unwound all of his positions due to severe trading losses.
In the face of this news, Thursday’s massive gains in AI stocks like Micron (MU) and Nebius Group (NBIS) are no surprise. Often, a definitive market bottom cannot be sustained until forced liquidations, margin calls, and extreme capitulation clear out over extended bullish positioning. This structural purging resets the deck and allows a healthier low-leverage accumulation phase to begin.
Bottom Line
Overleverage caused AI stocks to overshoot to the upside and then the downside. While violent margin washouts are painful, this capitulation is necessary for a sustained bull market to thrive.
Beyond Nvidia: AI's Second Wave Is Here
The AI revolution has already minted millionaires. But the stocks everyone knows about aren't likely to keep delivering the biggest profits. AI’s second wave is moving from infrastructure to implementation and these companies are at the forefront of this transition, positioned to become what Amazon and Google were to the internet era.
See Stocks Now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report
Micron Technology, Inc. (MU): Free Stock Analysis Report
Sandisk Corporation (SNDK): Free Stock Analysis Report
Alphabet Inc. (GOOGL): Free Stock Analysis Report
Meta Platforms, Inc. (META): Free Stock Analysis Report
Nebius Group N.V. (NBIS): Free Stock Analysis Report
SK Hynix, Inc. - Sponsored ADR (SKHY): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).