The Trade of the Year... Maybe the Decade

Alarm bells of the top... AI isn't really about software and robots... It's about energy... Our modern standard of living is built around energy... The trade of the year – maybe the decade...

I (Dan Ferris) am looking more and more like a sign of the top...

In my December 5 Digest, I told readers I had changed my tune on AI:

Well, the fact is that the AI boom rhymes significantly with the nearly decadelong dot-com boom. Since the AI boom started just three years ago, I have to believe it's not over yet.

As I explained, I didn't want to miss out on a massive wealth-generating opportunity.

On January 16, I doubled down and said that speculation in AI stocks was "getting interesting."

Folks who know me were probably surprised to hear that. I've always been skeptical of manic bull markets. And I've been bearish on the stock market over the past couple years.

I've also spent the past 20-plus years telling readers that they should only buy great businesses that have competitive advantages, consistent margins, and great balance sheets. These businesses should also gush free cash flow and trade at reasonable valuations.

So saying that speculative stocks were "worth a second look" probably set off some alarm bells.

It turned out to be a good contrarian signal.

The S&P 500 Index, which is dominated by Magnificent Seven stocks, is down more than 1% since January 1. The Bloomberg Magnificent 7 Total Return Index is down more than 7% since then. It recently traded about 7% below its all-time high.

Meanwhile, AI darling Nvidia (NVDA) hit its last new high on October 29 and recently traded about 12% below that level. Fellow big-name AI play Palantir Technologies (PLTR) topped out on November 3 and has fallen as much as 38% since then.

So it sure looks like I was behaving as a rank amateur...

I wouldn't blame you for thinking I was just excited about the newest thing and jumping into the trend after it started topping out in the market.

After all, as I reported in the January 16 Digest, the first AI stock I recommended to Ferris Report subscribers – Tempus AI (TEM) – flamed out.

However, in that Digest, I also discussed the fact that AI is closely tied to energy. You see, AI data centers have massive energy requirements.

So in December, I recommended two energy stocks in The Ferris Report. And in the February issue – out last Friday – I added two more.

It turned out to be the perfect contrarian opportunity...

According to data compiled by Bloomberg, energy stocks were up just 4.4% last year, with the S&P 500 up 16.4%, technology stocks were up 23.8%, and communications stocks were up 21.6%. Last year, energy stocks were the third-worst performer among the S&P 500's 11 sectors. Only consumer staples and real estate were worse, with slightly negative returns.

However, since the start of the year, energy is up around 25%.

The two energy stocks I recommended in December are up 39% and 32% as of yesterday's close. And after just one week, the two stocks I recommended in the February issue are up 8% and 2% – while the rest of the market fell.

(Ferris Report subscribers can find the December issue right here and the February issue here. If you don't already have a subscription to The Ferris Report, you can learn more here.)

Investors don't need to worry about future energy demand...

Our modern standard of living is built around energy. You see, the world uses four substances – steel, cement, plastic, and ammonia – in massive and growing quantities.

Various estimates suggest roughly half the world's population is fed by food grown with nitrogen-based fertilizers (and this nitrogen is produced from ammonia).

Next comes plastic. Lightweight and durable, plastic is malleable into an unfathomable variety of shapes and sizes, from paper-thin films and feather-light bottles to heavy-duty pipes and sturdy, durable trash cans.

You're wearing some form of plastic right now. Your desk, clothes, and house are all filled with plastic. You're surrounded by it. Given its widespread use in medicine today, you might have even had your life saved with the help of plastic.

Then there's steel, the skeleton and skin of much of the modern world. We make mammoth structures and tiny precision instruments with it. It is malleable, recyclable, and there are more than 3,500 varieties of it. It can bear loads 30 times larger than granite. It's 7 times stronger than aluminum and 4 times stronger than copper.

Finally, cement is the key ingredient in concrete, the most ubiquitous building material in the world. Most of Earth's inhabitants live in cities made of it. It's in foundations, walls, ceilings, and all the critical infrastructure of our world – from roads and runways to pipelines, sewers, bridges, and tunnels.

These substances are all made with fossil fuels.

Ammonia is synthesized from nitrogen (from the air) and hydrogen (primarily from natural gas) at high temperatures (overwhelmingly created using natural gas).

Plastic is derived from a variety of petroleum products, including ethane, propane, butane, and in some cases, even coal. The dominant fuel for making it is natural gas.

Steel is an alloy of iron and carbon and requires extremely high temperatures to make it. The carbon and the heat are both supplied by coal.

Cement is made by heating limestone in a kiln, powered by coal or petroleum coke (a rock-like form of petroleum), natural gas, and fuel oil.

After decades of development and trillions of dollars spent on so-called renewables (which aren't renewable in any meaningful way), fossil fuels still make up roughly 86% of global energy consumption.

The point of all this is very simple.

Don't worry about oil and gas demand. As long as the global population grows and as long as folks want to acquire and maintain a high standard of living, there will be plenty of demand for oil, natural gas, coal, and other fossil fuels.

AI will simply add another layer of constant demand.

That's why President Donald Trump created the Genesis Mission project, which, among other things, aims to develop nuclear and other energy sources.

Trump believes the U.S. will fall behind if it doesn't develop its AI capability. And that will require massive new energy development. Little – if any of it – will be in unreliable solar and wind. It'll all be in fossil fuels and nuclear power.

Fossil fuels already provide 58% of our electricity in the U.S. – mostly through natural gas and coal.

Also, roughly 95% of the U.S.'s 5,400 data centers use diesel generators for backup power. Even California – which hates fossil fuels with a burning passion – uses diesel for 90% of its backup power.

Meanwhile, diesel capacity is shrinking due to regulatory concerns. (I told Ferris Report subscribers the whole story in the December issue.)

Now, commodities prices are highly volatile and cyclical...

Thanks to fracking, the U.S. is the largest oil-producing country in the world, with about 19 million barrels a day (that includes all petroleum liquids). That's roughly 20% of global production.

We produce nearly all our oil by hydraulic fracturing and horizontal drilling. Much of that production capacity needs oil to be close to $60 a barrel or more to break even. Many independent drillers in the U.S. need $70 oil to make it worth drilling.

Even before the U.S. and Israel attacked Iran, oil prices were moving higher. You see, oil prices were so low that folks were shutting down production. Oil veteran and Continental Resources founder Harold Hamm announced in January that he was shutting down his company's large operations in the Bakken region in North Dakota and Montana – a region he discovered and has been operating in for more than 30 years.

His reasoning was simple: His breakeven price was $58, and oil in the low $60s and high $50s made it impossible to earn a decent profit margin. It just wasn't worth drilling. Lots of other oil executives had similar thoughts.

But the best cure for low prices is low prices.

Oil bottomed out at $55 a barrel in mid-December. And sure enough, oil was on the move even before the Iran attacks. Now, it's hitting a two-and-a-half-year high in the $90s.

If the Iran war ends soon, prices will likely drop back down. Those lower prices would benefit the lowest-cost producers (four of which I've added to The Ferris Report model portfolio). They would put a lot of other producers out of business, perhaps permanently in some cases, if prices don't recover quickly enough.

And even if higher prices persist, it'll take some time for producers to trust them and restart production. Oil production doesn't turn on and off like a light switch.

But if the world wants to keep living a modern lifestyle, oil will never be able to spend too long in the $50s or lower. In a recession or crisis, maybe they could go into the $40s or lower. Oil prices fell below $0 in April 2020 and were $50 or lower for almost an entire year, but that was because world governments shut down the global economy during the pandemic.

Summing up... AI isn't really about software and robots. It's about energy.

The hyperscalers like Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), and Microsoft (MSFT) are spending billions of dollars on AI and data centers. But they already aren't seeing much return for their massive capital investments. It's unlikely they ever will. They'll be left with debt-laden balance sheets and huge loss-making assets that cost a fortune to operate.

Meanwhile, the big AI-darling stocks appear to have topped out for now.

But energy stocks are just getting started. While fossil-fuel prices will always be highly volatile and cyclical, the world can't grow without them.

Energy is what's most interesting about AI. It's the trade of the year... maybe of the decade.

New 52-week highs (as of 3/5/26): Black Stone Minerals (BSM), CF Industries (CF), Chord Energy (CHRD), Chevron (CVX), EOG Resources (EOG), EQT (EQT), Freehold Royalties (FRU.TO), Cheniere Energy (LNG), Magnolia Oil & Gas (MGY), Matador Resources (MTDR), Nexstar Media (NXST), New York Times (NYT), Plains All American Pipeline (PAA), Roivant Sciences (ROIV), USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI), and Valero Energy (VLO).

In today's mailbag, feedback on yesterday's edition, which discussed the labor market... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Looking at the labor market and the associated adjustments, I am reminded of this quote: 'The beatings will continue until morale improves.'" – Subscriber Deborah F.

Good investing,

Dan Ferris
Medford, Oregon
March 6, 2026