The capitulation selling on Wednesday was apparently triggered by the meltdown in the Situational Awareness hedge fund that, according to the Financial Times, was up 439% in the first six months of 2026. The Wall Street Journal reported that Situational Awareness was down 67% in July. Due to excess leverage by prime brokers, Situational Awareness was put on a “watch list” by some prime brokers, which quickly led to its eventual demise. Citadel has snapped up what is left of Situational Awareness.
The wild trading in (BE) and (SNDK) was apparently triggered by the unwinding of Situational Awareness. Ironically, it was not the stock picking or AI that sunk Situational Awareness, but merely the magnitude of leverage that was apparently in excess of 10 to 1. This is not the first time that prime brokers have sunk a hedge fund by aiding and abetting leverage. The same thing happened to Bill Hwang of Archegos Capital Management back in 2021. Bill was subsequently sentenced to 18 years in jail for market manipulation. Due to Citadel’s rescue of Leopold, I expect him to escape any charges and rebound. Leopold just has to remember not to use leverage if he re-emerges as a money manager.
Fortunately, as wave after wave of second quarter earnings have been announced, fundamentally superior stocks have firmed up immensely. Not only are sales and earnings still accelerating, but the big story is that order backlogs continue to swell. Right now, the order backlog is so big that the data center boom is expected to persist through at least 2029.
Interestingly, the European Union (EU) is now calling for government and private investment in several AI gigafactories. Specifically, the EU formally launched a bidding process for large-scale artificial-intelligence factories in an effort to build out its own tech capabilities and catch up with rivals like the U.S. and China. The European Commission said Thursday that this tender offer will be supported by 10 billion euros ($11.47 billion) in public funding from the EU and member states and is hoping to attract 20 billion euros of private investment. This tender offer will support up to seven AI gigafactories. I am happy to see that the EU is finally embracing AI, which just means that the order backlogs for AI data center companies will continue to grow.