In the following guest post, Nessim Mezrahi and Stephen Sigrist present their view that U.S. securities litigation risk is increasing significantly, driven by geopolitical instability and weakening investor confidence in the AI investment proposition, and that growing market capitalization losses, increased shareholder scrutiny, and the potential for an AI-related market correction are creating heightened securities litigation exposure. Nessim Mezrahi is co-founder and CEO, and Stephen Sigrist is a senior vice president, at SAR LLC. Our thanks to Nessim and Stephen for allowing us to publish their article on our site.
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Geopolitical instability continues to complicate disclosure adequacy for public companies and is facilitating the materialization of securities litigation risk due to heightened corporate governance demands by shareholders.[1] Between June 30, 2025, and June 30, 2026, the aggregate market capitalization for issuers in the NYSE and NASDAQ expanded by ~28%, from ~$70.3 to ~$90 trillion. Over the salient period, the two-year market capitalization losses on high-risk adverse corporate events increased by ~48%, from ~$11.8 to ~$17.4 trillion.[2] Our analysis indicates that market capitalization losses have outpaced market cap growth in U.S. equities. To “pick up slack for plummeting” enforcement by the U.S. Securities and Exchange Commission, plaintiff securities class action attorneys are touting their “superior effectiveness” in seeking monetary recompense due to allegedly defrauded shareholders for violations of the federal securities laws.[3]
Stock price impact data indicate that investors have begun to lose conviction on the story behind the artificial intelligence (AI) investment thesis, particularly for some large cap issuers in the information technology sector. According to Jonathan Weil of the Wall Street Journal, “Wall Street’s forecasts for Big Tech require a major leap of faith: that the biggest AI hyperscalers can boost revenue much faster than the costs of running their businesses. Some of the numbers look too good to be true.”[4] According to Weil’s analysis, free cash flow for Alphabet, Meta, Microsoft, and Oracle is not expected to break even until at least 1Q 2027, when capex is estimated to exceed one trillion dollars.[4] That’s just around the corner and situational awareness suggests the time horizon is likely to be premature.
July’s trading data on the information technology sector indicate that investor sentiment is worsening based on the magnitude of recently deployed capex and may continue to do so if Big Tech does not reverse free cash flow’s falling knife by the start of second half of 2027. According to Asa Fitch of The Wall Street Journal, “[i]nvestors have given Big Tech a long leash to invest in AI over the past few years. That made sense given the capital intensity of what looked like a potentially world-changing boom. But shareholder patience is being tested like never before, as tech giants take AI ambitions to the next level even as the cost of computer memory and other AI-infrastructure components rises.”[5]
Confidence decay in the AI play is driving the increase in the frequency and severity of high-risk adverse corporate events in the sector. As of Dec. 31, 2025, information technology accounted for ~$4.1 trillion in market capitalization losses over the two-year period.[6] As of June 30, 2026, the information technology sector accounted for ~$5.7 trillion. [7] Based on the magnitude at stake, conditions are ripe for increased investigative scrutiny by institutional investors.
When comparing the growth in market capitalization relative to the growth in market capitalization losses, the numbers present an eerie prognostication of the sector. Between December 31, 2025, and June 30, 2026, market cap losses grew ~1.6x relative to the ~23.9% growth in market cap. It is not surprising that trading data in information technology through July 28, 2026, prompted a market correction in the NASDAQ-100.[8]
The impact is not limited to an increase in the deterioration of securities litigation risk for issuers in information technology. The effect is bleeding over into credit risk based on the scale of capex investments directly related to the push for AI dependence. According to Fitch Ratings, “[t]he global credit risk environment has evolved heading into 2H26 but continues to be driven by two main sources of short-term risk: rising vulnerability to an AI-related market correction and persistent geopolitical uncertainty in the Middle East.”[9]
Sustained geopolitical uncertainty coupled with multiple market corrections in tech prior to 2027 may be a precursor to greater deterioration in securities litigation risk for both U.S. and non-U.S. issuers across all sectors due to AI’s interconnectivity. According to Fitch, “[t]he combination of revenue uncertainty and the extent to which capital markets and economies have become intertwined with the AI story have created a key potential vulnerability for credit in the event of a re-evaluation of long-run returns potential. Very short-term spikes in market volatility for individual equities and tech-heavy stock indices have already been observed, but a larger, more protracted correction could have wider market, macro and credit effects depending on its scale, duration and contagion.”[9]
Based on our stock price impact data derived from single-firm event study analyses on 11,557 corporate disclosures from a population of 4,648 U.S. public companies, empirical results demonstrate an increasing deterioration in securities litigation risk, driven by both geopolitical instability and flailing investor confidence on the AI story. There is little doubt that uninformed issuers will flop on their disclosures when internal truths on AI are revealed.
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[1] “How Securities Litigation Risk Materialized In the 1st Quarter,” Nessim Mezrahi, Stephen Sigirst. Law360, April 13, 2026.
[2] Market capitalization losses account for the decline in market capitalization on single trading days that coincided with the release of company-specific information both directly and through SEC filings and that exhibited a statistically significant stock price decline at the 95% confidence level after controlling for the impact of the S&P 500 Total Return index and industry-specific factors for the corresponding population of active issuers in the NYSE and NASDAQ over a two-year period.
[3] “Private Investors Pick Up Slack for Plummeting SEC Enforcement,” Bloomberg Law, July 30, 2026.
[4] “Big Tech Stocks Are Pricing In a Miracle on Costs,” Jonathan Weil, The Wall Street Journal, July 28, 2026.
[5] “Meta’s Case for Its AI Spending Keeps Getting Weaker,” Asa Fitch, The Wall Street Journal, July 30, 2026.
[6] SAR U.S. Securities Litigation Risk Report 2H 2025.
[7] SAR U.S. Securities Litigation Risk Report 1H 2026.
[8] “Nasdaq-100 Enters Correction Territory,” WSJ Staff, July 29, 2026.
[9] Fitch Ratings Global Risk Outlook: 3Q26 ‘AI Market Correction Emerging as Major Credit Risk’.
