'They're shooting the generals': AI trade stocks drop as hedge funds rush to protect 2026 gains

The AI trade's marquee stocks got clobbered on Thursday, as the tech-heavy Nasdaq ( ^IXIC ) sank 5% , sparking warnings on Wall Street of an institutional shakeout as investors move to lock in gains.

"They're shooting the generals," wrote Nomura cross-asset strategist Charlie McElligott on Thursday.

The unwinding of the 2026 popular thematic stocks has been "wildly acute" for more than a month, the strategist noted. The primary catalyst isn't about a sudden deterioration in fundamentals, but a frantic dash by hedge funds to lock in their profits before the end of the year.

"Single-name stock moves are absolutely BONKERS," wrote McElligott. "The Momentum/High Sharpe unwind has been so substantial that we are approaching the dreaded 'Round Trip' levels in some trades."

The carnage has hit semiconductor and hardware stocks particularly hard. Shares of Lam Research ( LRCX ) are down 36% over the past month. Applied Materials ( AMAT ) has shed 30% over the past month, while AMD ( AMD ) and Nvidia ( NVDA ) are also down 22% and 15% respectively over the same period.

Investors have been selling off crowded high-momentum trades and shifting into previously lagging areas of the market. Analysts have also pointed to worries over a potential slowdown in AI data center build-outs following a Democratic sweep, exacerbating selling on Thursday.

Memory chipmaker Micron ( MU ) sank 17% during the session, extending declines over the past month to roughly 38%, as seen on Yahoo Finance's AlphaSpace chart. Year to date, the stock is still up roughly 140%.

Even Energy stocks ( XLE ), which have been the best performers this year, are down 7% over the past five days. Shares of gas turbine maker GE Vernova ( GEV ), which has been on fire this year amid booming demand for data center power, have declined nearly 20% over the past month.

Caterpillar ( CAT ), whose data center power generation equipment business boomed this year, saw its stock fall 32% over the past month.