Every day this week, I've touched on how the AI boom is likely a bubble. But this isn't a recent opinion of mine. In my January 28 e-mail about the investment implications of the AI bubble bursting, I wrote:
I think the AI bubble could burst later in the year, not immediately.
Here's why: Most bubbles don't suddenly burst. If this one turns out to be anything like those we went through in 1999, 2007, or even late 2021, the biggest moves happen in the run's final phase, where there's a blow-off top before the crash. And that's where I think we are right now.
So far, my prediction has played out exactly as I expected. Now here we are, later in the year, and I think the AI bubble has had its blow-off top... and is now beginning to burst.
If I'm right, what are the implications for investors? How might you protect your portfolio – and even profit – from the bubble bursting?
One of my readers, Greg M., asked:
It seems like if things go south, the AI frontier labs are going to take the brunt of the damage, but I would think maybe the hyperscalers would probably take massive hits as well. Certainly not to the point of going out of business or anything, but a serious hit to their stock prices.
With that said, does it change how to view the Stansberry's Investment Advisory recommendation on Alphabet (GOOGL)? I know you like to let your winners run, and Alphabet certainly qualifies as a winner, but does the risk of this busting give some pause and maybe a thought about taking profits?
Those are great questions, Greg. As my readers know, I can't give individual investing advice. And only Investment Advisory subscribers receive updates about our open recommendations. (If you're not already subscribed, you can do so by clicking here.)
But allow me to share some general thoughts...
First of all, if you don't need to take on a lot of risk, don't!
For example, my 84- and 86-year-old parents have built a nice nest egg thanks to a lifetime of steady employment and frugal living, as I detailed in my June 8 e-mail. They don't need big stock market returns to live happily ever after.
That's why, as I described in my June 9 e-mail, they have 35% of their total assets in cash and bonds, 37% in stocks, and 28% in the one piece of property they own – their home outside of Nairobi, Kenya.
If you're in a similarly fortunate position but have a large exposure to stocks, you might think about dialing back the risk – especially if you can do so in retirement accounts, so you don't have to pay big capital-gains taxes.
But younger investors might want to have more exposure to stocks because they have a much longer investment horizon.
For example, in my October 8 e-mail, I detailed the advice I gave to my 27-year-old daughter Emily. Given the richly valued market and concerns about the bursting of the AI bubble, I suggested that she keep 20% of her portfolio in cash – making sure she's earning a market interest rate on it, which is currently 3.5%.
I also suggested that she diversify the remaining 80% of her portfolio that's currently invested in the S&P 500 Index by adding small-cap, mid-cap, and international index funds. (Note that I didn't recommend any actively managed funds.) But eventually, I'd like her equity exposure to be at 90% with only 10% in cash.
As for the stock market, I think today resembles March 2000, when the Internet bubble peaked. But that doesn't mean you need to sell everything...
Most bubbles burst slowly, giving savvy investors plenty of time to sell what should be sold and adjust their portfolios.
For example, the tech-heavy Nasdaq Composite Index tumbled 39.3% in 2000 and ended the year down 51% from its March 10 high. But the S&P 500 was down just 10.1% for the year, and the Dow Jones Industrial Average was only down 6.2%.
There are also some important differences between then and now. As my friend Doug Kass of Seabreeze Partners wrote this morning in a memo (for subscribers), The Fall of 2026 Is Starting to Resemble the Spring of 2000:
Today's large cap technology stocks (as opposed to the dot.com stocks) have deep moats and though their commitment to massive AI spending has transformed some of the tech equities from capital light to capital intensive), they have maintained strong operating and profit profiles. Unlike 26 years ago, the Magnificent 7 represent a large percentage of the indices – which, in a backdrop in which passive products and strategies ([exchange-traded funds], quants), means that investor inflows go into and directly/steadily support/buoy the shares of Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), Micron (MU), Sandisk (SNDK), and Meta Platforms (META).
Today's defensive consumer staples have faced the competitive threat of generic and unbranded products over the last 15 years. And now in more recent years there's the headwind from the GLP-1 drugs, a new class of medications that can help manage Type 2 diabetes and obesity by reducing appetite. Unlike 26 years ago, a combination of these two factors are pressuring consumer staples' top and bottom lines.
This leads Doug to conclude:
As a result of these differences, the downside to the Mag-7 constituents (and memory and semiconductors) is much more muted than 2 1/2 decades ago (vis-à-vis dot.com stocks). And the upside to the classically defensive consumer non-durables is also more limited than 2 1/2 decades ago.
Importantly, given the rise in the risk-free rate of return (using the 10-year Treasury note) to almost 5.3% suggests to me that rather find a home in the consumer staples space, it is more likely that market participants will seek refuge in fixed income.
I think Doug is right that investors should be wary of consumer-staples stocks that are too richly valued and/or have exposure to changing diets due to weight-loss drugs.
On both fronts, Coca-Cola (KO) is a good example. It hit an all-time high yesterday and trades at around 28 times this year's consensus analysts' earnings estimates.
I would also avoid the even more richly valued shares of Costco Wholesale (COST) and Walmart (WMT). As fabulous as these businesses are, they trade at 42.9 and 40.8 times this year's estimates, respectively.
I also think Doug is right that cash and bonds, which are now paying multiyear-high interest rates, are a reasonable place for a portion of one's portfolio – depending on things like age and financial situation, as I discussed above.
Lastly, I agree with Doug that some of the Magnificent Seven stocks will do just fine as the AI bubble bursts. I'll review all of them in Monday's e-mail, so stay tuned...
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. One of the reasons I've raised so much money for Ukraine and traveled there seven times in the past three and a half years is that I'm inspired by many of the people I meet.
One of them is Viktor, an evangelical pastor whom I met earlier this year at a conference in Washington, D.C. and hosted a dinner for in New York City.
I saw him again earlier this week when I was in Kyiv where he presented me with an award to thank me for my donations to his unit, the famed Azov brigade. Here's a picture of me, Viktor (in black), his wife Svitlana, and my friend Chad, an American living in Kyiv:
Viktor has a remarkable story. In 2014, he was working with Ukrainian forces to evacuate civilians from his home in Luhansk in eastern Ukraine. The Russians, who unofficially controlled the city, learned what he was doing and captured him.
Upon hearing this, Svitlana, who had moved with their young son to safety in western Ukraine, rushed back to Luhansk. Fearing the worst, she went to the morgue. But they sent her to a nearby building where the Russians held prisoners in the basement – and generally tortured and killed them.
Day after day, she begged the Russians to release Viktor to no avail. Then, on his 25th day of captivity, a miracle occurred. A fancy black car drove up to the building, and Svitlana beat on the door. A high-level Russian commander rolled down the window, and she pleaded for Viktor's life. To her shock, the commander agreed to release him. And to this day, no one can explain why.
After they fled, Viktor joined Azov and has become a powerful voice speaking out about how the Russians are persecuting Christians in the areas they occupy in Ukraine. He comes to the U.S. regularly to meet with evangelical leaders in Congress, the Trump administration, and across the country.
You can read articles he has published here. In this one, he describes his captivity and how the Russians tortured him. He's also featured in the documentary, A Faith Under Siege. You can watch a clip of him here, the trailer here, and the full documentary for free here.