diff --git a/agent-shell-ui.el b/agent-shell-ui.el
index cf09835f..0217ae33 100644
--- a/agent-shell-ui.el
+++ b/agent-shell-ui.el
@@ -41,6 +41,13 @@
   "A hash table used to save sui content like body.
 This avoids duplicating body content in text properties which is more costly.")
 
+(defvar agent-shell-ui-post-toggle-fragment-at-point-functions nil
+  "Hook called after toggling a fragment at point.
+Each function is called with three arguments:
+  BLOCK - the block range alist with :start and :end
+  BODY - the body range alist with :start and :end
+  COLLAPSED - non-nil if the fragment is now collapsed")
+
 (cl-defun agent-shell-ui-make-fragment-model (&key (namespace-id "global") (block-id "1") label-left label-right body)
   "Create a fragment model alist.
 NAMESPACE-ID, BLOCK-ID, LABEL-LEFT, LABEL-RIGHT, and BODY are the keys."
@@ -529,7 +536,9 @@ When NO-UNDO is non-nil, disable undo recording."
                              (point) indicator-properties)
         (map-put! state :collapsed new-collapsed-state)
         (put-text-property (map-elt block :start)
-                           (map-elt block :end) 'agent-shell-ui-state state)))))
+                           (map-elt block :end) 'agent-shell-ui-state state)
+        (run-hook-with-args 'agent-shell-ui-post-toggle-fragment-at-point-functions
+                            block body new-collapsed-state)))))
 
 (defun agent-shell-ui-collapse-fragment-by-id (namespace-id block-id)
   "Collapse fragment with NAMESPACE-ID and BLOCK-ID."
diff --git a/agent-shell-viewport.el b/agent-shell-viewport.el
index 5e3b6636..2c38ee13 100644
--- a/agent-shell-viewport.el
+++ b/agent-shell-viewport.el
@@ -73,6 +73,7 @@
 (declare-function agent-shell-ui-backward-block "agent-shell")
 (declare-function agent-shell-ui-forward-block "agent-shell")
 (declare-function agent-shell-ui-mode "agent-shell")
+(declare-function agent-shell--apply-markdown-overlays-on-body-expand "agent-shell")
 (declare-function agent-shell-completion-mode "agent-shell-completion")
 (declare-function agent-shell-yank-dwim "agent-shell")
 
@@ -1315,6 +1316,8 @@ For example, offer to kill associated shell session."
 \\{agent-shell-viewport-view-mode-map}"
   (cursor-intangible-mode +1)
   (agent-shell-ui-mode +1)
+  (add-hook 'agent-shell-ui-post-toggle-fragment-at-point-functions
+            #'agent-shell--apply-markdown-overlays-on-body-expand nil t)
   (agent-shell-viewport--update-header)
   (setq-local filter-buffer-substring-function #'agent-shell--filter-buffer-substring)
   (setq buffer-read-only t)
diff --git a/agent-shell.el b/agent-shell.el
index 88ee413f..5ecb9e50 100644
--- a/agent-shell.el
+++ b/agent-shell.el
@@ -244,6 +244,15 @@ See https://github.com/xenodium/agent-shell/issues/119"
   :type 'boolean
   :group 'agent-shell)
 
+(defun agent-shell--apply-markdown-overlays-on-body-expand (_block body collapsed)
+  "Apply markdown overlays when BODY is expanded (COLLAPSED is nil).
+Intended for use with `agent-shell-ui-post-toggle-fragment-at-point-functions'."
+  (unless collapsed
+    (save-restriction
+      (narrow-to-region (map-elt body :start) (map-elt body :end))
+      (let ((markdown-overlays-highlight-blocks agent-shell-highlight-blocks))
+        (markdown-overlays-put)))))
+
 (defcustom agent-shell-confirm-interrupt t
   "Whether to prompt for confirmation before interrupting.
 
@@ -2816,6 +2825,8 @@ variable (see makunbound)"))
       (add-hook 'kill-buffer-hook #'agent-shell--clean-up nil t)
       (add-hook 'change-major-mode-hook #'agent-shell--clean-up nil t)
       (agent-shell-ui-mode +1)
+      (add-hook 'agent-shell-ui-post-toggle-fragment-at-point-functions
+                #'agent-shell--apply-markdown-overlays-on-body-expand nil t)
       (when agent-shell-file-completion-enabled
         (agent-shell-completion-mode +1))
       (agent-shell--setup-modeline)
@@ -3003,9 +3014,11 @@ by default, RENDER-BODY-IMAGES to enable inline image rendering in body."
             (when-let ((body-start (map-nested-elt range '(:body :start)))
                        (body-end (map-nested-elt range '(:body :end))))
               (narrow-to-region body-start body-end)
-              (let ((markdown-overlays-highlight-blocks agent-shell-highlight-blocks)
-                    (markdown-overlays-render-images render-body-images))
-                (markdown-overlays-put))))
+              ;; Skip overlays when body is collapsed.
+              (unless (text-property-any (point-min) (point-max) 'invisible t)
+                (let ((markdown-overlays-highlight-blocks agent-shell-highlight-blocks)
+                      (markdown-overlays-render-images render-body-images))
+                  (markdown-overlays-put)))))
           ;; Note: For now, we're skipping applying markdown overlays
           ;; on left labels as they currently carry propertized text
           ;; for statuses (ie. boxed).
@@ -3053,13 +3066,15 @@ by default, RENDER-BODY-IMAGES to enable inline image rendering in body."
            ;; `agent-shell-next-item' and `agent-shell-previous-item'.
            (add-text-properties (or padding-start block-start)
                                 (or padding-end block-end) '(field output)))
-         ;; Apply markdown overlay to body.
-         (when-let ((body-start (map-nested-elt range '(:body :start)))
-                    (body-end (map-nested-elt range '(:body :end))))
-           (narrow-to-region body-start body-end)
-           (let ((markdown-overlays-highlight-blocks agent-shell-highlight-blocks))
-             (markdown-overlays-put))
-           (widen))
+          ;; Apply markdown overlay to body.
+          (when-let ((body-start (map-nested-elt range '(:body :start)))
+                     (body-end (map-nested-elt range '(:body :end))))
+            (narrow-to-region body-start body-end)
+            ;; Skip overlays when body is collapsed.
+            (unless (text-property-any (point-min) (point-max) 'invisible t)
+              (let ((markdown-overlays-highlight-blocks agent-shell-highlight-blocks))
+                (markdown-overlays-put)))
+            (widen))
          ;;
          ;; Note: For now, we're skipping applying markdown overlays
          ;; on left labels as they currently carry propertized text