Chief investor urges people to quit chasing AI, says it’s not a matter of if but when it 'breaks’ — how to prepare

Bill Smead of Smead Capital Management warns that the current AI market displays bubble characteristics akin to the dot-com crash, citing "untethered" valuations for companies like Nvidia and Palantir, and CoreWeave's high valuation relative to revenue. He highlights the technology sector's 34% weighting in the S&P 500, exceeding the March 2000 peak, and expresses concern over "circular financing" exemplified by Nvidia's investment in OpenAI. Smead predicts a significant market correction when the "massively overcapitalized" AI sector "breaks," potentially causing substantial daily stock drops and a broad domino effect on U.S. equity markets.

Analysis

Bill Smead of Smead Capital Management warns that the current AI market exhibits bubble characteristics reminiscent of the dot-com crash, citing "untethered" valuations. He highlights Nvidia's twelvefold increase to $4.4 trillion and Palantir's twenty-eight-fold surge to $420 billion since early 2023. Furthermore, CoreWeave's $60 billion valuation on just $1.2 billion in quarterly revenue underscores these elevated metrics.

The technology sector's significant concentration, now comprising 34% of the S&P 500, surpasses the peak observed in March 2000, signaling potential systemic risk. Smead also points to increasing "circular financing" arrangements, such as Nvidia's planned $100 billion investment in OpenAI, as a historical parallel to the late 1990s dot-com era. This self-reinforcing feedback loop raises concerns about market stability.

Smead predicts a substantial market correction when the "massively overcapitalized" AI sector "breaks," potentially leading to daily stock value drops of up to 40%, akin to the dot-com bust. This could trigger a broad domino effect across U.S. equity markets, particularly impacting the significant portion of American household wealth currently tied to Big Tech.

Key Decisions for Investors

• Re-evaluate exposure to highly-valued AI-centric stocks like Nvidia and Palantir, considering the potential for significant corrections as warned by Smead.
• Monitor the technology sector's weighting within broader indices and assess portfolio concentration risks, especially given its current 34% share of the S&P 500.
• Exercise caution regarding companies exhibiting high valuations relative to revenue, such as CoreWeave, and be wary of "circular financing" structures that may indicate market froth.