The Shakeout AI Investors Were Waiting For

Editor's note: AI leaders just endured their sharpest pullback of the year. But history suggests this setup doesn't mean the end for the biggest names. In this issue – adapted from the free Altimetry Daily Authority – Joel Litman explains why the biggest winners tend to remain leaders through bull markets... and why the recent pullback means the opportunity is just beginning.

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) saw their market cap shrink between 6% and 12%.

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

But beneath the panic, Goldman Sachs (GS) spotted a pattern...

Goldman's High Beta Momentum Basket – a collection of the best-performing stocks – 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%, it returned 11% on average over the next month.

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 AI slide last month. A widely circulated MIT paper claimed that only 5% of generative AI pilot projects are profitable.

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...

Pullbacks Prove Market Leaders' Staying Power

This recent sell-off looks almost identical to quick 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 were the first to sell off during corrections... and they sold off the hardest. But then, they led 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... and emphasized the 100 best-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 at least three separate times.

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 sit at or above the 200-DMA, we're likely looking at a near-term rally, according to Goldman.

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

So while shakeouts are part of every bull market, 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'll also create the next wave of gains.

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

This strange anomaly caused 300 stocks to double since the market 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 shake-up that could unfold before earnings season starts in just a few weeks.

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

Editor's note: Joel has attracted an elite roster of private clients, including more than half of the world's 300 largest money managers. But for the first time, he recently revealed a groundbreaking discovery that could lead to multiple 100% gains over the next year. And investors don't have long before "warp-speed price moves" unfold in dozens of America's favorite public companies.