The AI Build-Out Strikes a Sour Note
Last Wednesday, OpenAI Chief Financial Officer Sarah Friar put the artificial-intelligence ("AI") bears in a frenzy...
Friar appeared at the Wall Street Journal's Tech Live conference to discuss the business of AI. But the interview got away from her when she started talking about financing the next wave of growth for OpenAI...
Friar proposed a few sources of funding, including "an ecosystem of banks, private equity, [and] maybe even governmental."
When the interviewer asked her to clarify whether governmental funding meant federal subsidies, Friar replied...
Meaning, first of all, the backstop – the guarantee – that allows the financing to happen.
Friar's word choice comes with uncomfortable echoes of the "too big to fail" era of U.S. banking. When the great financial crisis unfolded in 2008, the government had to step in to subsidize failing banks...
With Friar's remarks on federal backstops for the AI build-out, investors became nervous about OpenAI's finances. And as we'll explain, it wasn't the only reason tech stocks took a dive last week...
What to Do After Bad News for AI
Worse still was the White House's response to Friar's comments. Thursday morning, President Donald Trump's "AI czar" David Sacks posted on social media platform X...
There will be no federal bailout for AI. The U.S. has at least 5 major frontier model companies. If one fails, others will take its place.
OpenAI launched into damage control on Thursday. CEO Sam Altman took to X with a long post denying that OpenAI needs government help.
Now, Friar's mention of backstops was likely a slip of the tongue. But after more bad news last week, growing negative sentiment is starting to move the market...
The world's most notorious bear is now shorting the AI trade.
Michael Burry is the founder of Scion Asset Management, a hedge fund that deals heavily in water, farmland, and gold. But he's more famous for his bet against the U.S. housing market during the great financial crisis, which inspired Michael Lewis' 2010 bestseller The Big Short. (Christian Bale played Burry in the film version.)
The real-life Burry remains a major market player. And last Wednesday, his hedge fund revealed a nearly $1.1 billion short against two of Wall Street's biggest AI darlings... Nvidia (NVDA) and Palantir Technologies (PLTR).
Now, Burry isn't infallible. But his bet against AI has folks on edge. Last week, tech stocks charted their worst performance since April.
Sentiment around AI is in the pits today. And many people – Burry chief among them – have speculated that the AI trade is a bubble getting ready to burst.
It's a nice idea... but the truth is, it's extremely difficult to call the top in bull markets.
The S&P 500 Index has gone up in 72% of the years going back to 1950... giving the bulls a significant statistical edge.
What's more, tech stocks have soared nearly 100% since ChatGPT 3.5 launched on November 30, 2022. Anyone who bet against the "AI bubble" would've missed out on tremendous profits over the past three years.
That won't be the case forever. But the point here is that it's risky trying to time the market – especially on the bear side.
Fortunately, there's another way...
Remember, Burry has a reputation to uphold. Taking big, bearish swings against the prevailing narrative is what he's famous for...
But you don't have to hang too much of your portfolio on a single narrative. Instead, you can play defense through proper allocation.
Right now, it's easy to carry excessive AI exposure in your portfolio. Nvidia alone makes up 7% of the S&P 500 due to market-cap weighting.
For portfolio protection, you can't own just AI stocks – or even just the S&P 500.
Instead, spread your money across asset classes, such as...
- Equal-weight index funds
- Precious metals and crypto
- Bonds
- Cash
AI companies do have a place in your portfolio. But take stock of how much you own. A good rule of thumb is to trim any company that takes up more than 3% of your portfolio.
It's too soon to know whether the bears are right about the AI bubble. But by allocating properly, you don't have to guess.
With diversification, you can defend your wealth through any market cycle – and live to fight another day.
Add variety to your portfolio today.
Good investing,
Sean Michael Cummings
Further Reading
"AI spending is growing," Sean writes. Not everyone is bearish on AI. According to one analyst, there's plenty of money to be made as AI continues to drive the market. And savvy investors can look to five profit engines for opportunities to profit.
If you're like most folks, you've felt the instability of the markets this year. But investing in stocks is always risky... and even the best blue chips aren't immune to uncertainty. Instead of trying to avoid drawdowns, your best bet is to follow one key principle of good investing.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
American Express (AXP)... financial giant
Banco de Chile (BCH)... financial services
Grupo Cibest (CIB)... Colombian bank
McKesson (MCK)... health care giant
Cencora (COR)... pharmaceuticals
Roivant Sciences (ROIV)... biopharmaceuticals
Cardinal Health (CAH)... prescription drugs
CareTrust REIT (CTRE)... health care REIT
Ciena (CIEN)... telecom equipment
Imax (IMAX)... movie theaters
Las Vegas Sands (LVS)... casinos and resorts
Expedia (EXPE)... online travel agency
Valero Energy (VLO)... oil refiner
BP (BP)... oil and gas
NEW LOWS OF NOTE LAST WEEK
Fiserv (FI)... digital payments
DraftKings (DKNG)... sports-betting leader
Chipotle Mexican Grill (CMG)... tacos and burritos
Cava (CAVA)... restaurants
Clorox (CLX)... cleaning supplies
LyondellBasell Industries (LYB)... chemicals
Zoetis (ZTS)... pharmaceuticals