The Moonshot Spark
It started with a quiet announcement from a private Chinese company called Moonshot. The startup said it made a breakthrough that shocked investors who were already on edge about competition and the massive spending in artificial intelligence.
The reaction was immediate and harsh. The Nasdaq 100 lost 4.13% in a single week, while the S&P 500 fell around 1.5%. The real damage hit semiconductor stocks, which sit at the center of the AI boom.
A key benchmark for chips fell about 20% from its June high, moving into official bear-market territory. International Business Machines Corp. tumbled too, as some worried the breakthrough could disrupt software business models. Even SpaceX, one of the year's biggest new listings, fell beneath its IPO price. Big losses also hit Samsung Electronics and SK Hynix, two South Korean chipmakers popular with individual investors.
According to Alpine Saxon Woods' chief market strategist Sarah Hunt, who spoke to Bloomberg Television, the situation mirrored the DeepSeek moment from the previous year. "This reminds me a lot, and, not surprisingly, of the DeepSeek moment," she said. "I do think there was some vulnerability just on how much these stocks have run and what people have been pricing in."
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Leveraged Funds Made It Worse
The selloff got worse because of how many retail traders had piled into leveraged ETFs. These ETFs employ derivatives to combine magnified bullish and bearish wagers into securities that trade like normal stocks. Leveraged ETFs now hold assets approaching $200 billion.
That equals just 1.2% of industry assets and under 1% of the overall US stock market. Yet these funds generate about 13% of total daily trading volume in US ETFs.
Eric Balchunas, an analyst at Bloomberg Intelligence, put it bluntly: "If they make up 13% of volume but 1% of assets, it tells you that people are trading the heck out of them - which is exactly what you're supposed to do." When market mood shifts, the daily rebalancing of these funds turns them into significant sellers that amplify existing trends. The triple-leveraged SOXL fund, which tracks semiconductors, lost more than half its value during the rout. Cumulative gains from all leveraged ETFs since their inception have been about $70 billion, according to Bloomberg Intelligence, though that figure is heavily concentrated in funds like TQQQ.
"Some Americans love to gamble and speculate and they're basically using these in a way they think is a fair deal," said Balchunas.
A clear recent case came from South Korea, where authorities are now restricting single-stock leveraged ETFs. Local individual investors had become among the globe's largest purchasers of securities that multiplied daily returns from AI chip stocks. Once the mood shifted, leveraged ETFs had to unload billions of dollars' worth of SK Hynix holdings along the way.
What This Means for Your Portfolio
The bigger lesson is that the AI boom has reached a stage at which technological advances can rapidly upend investors' views on winners and losers. Focused gambits, particularly those using borrowed money, are much trickier now than they were earlier in the cycle.
Rebecca Walser, who leads Walser Wealth Management, tracks retail investor behavior during such episodes. "What does concern me is how volatile and quick people are to pull the trigger," she said. "What this tells me is they don't have true confidence that this is a long term play."
For anyone investing today, the environment calls for more caution than it did a year ago. This selloff might be temporary - a scare that fades as the market digests the news. But it could also be the start of a deeper rethink about which AI winners will survive.
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