I'm writing this to gain some mental clarity amid mounting concerns about an AI bubble and potential market correction. Tech stocks have been hit particularly hard recently, as investor sentiment has weakened following reduced expectations for Federal Reserve rate cuts and ongoing sector rotation away from growth stocks.
At first, I wanted to dismiss the negative headlines. After all, we've seen this pattern before: financial pundits and media outlets sound the alarm about an impending crash, investors buy the dip, prices recover, and the cycle repeats.
But a recent portfolio analysis gave me pause. When I asked an AI tool to review my holdings, the assessment was sobering. My portfolio was heavily concentrated in tech stocks and didn't align with my stated risk tolerance. Even more concerning, what I had considered a diversified portfolio was actually "di-worse-ification", too many individual holdings creating unnecessary complexity without genuine diversification.
This prompted me to examine whether fears of an AI bubble are justified. Several warning signs suggest we may be in the early stages of one, even if we haven't reached catastrophic levels yet.
Red Flags I'm Watching
The valuations of many AI companies assume massive, sustained revenue growth that may not materialize. Meanwhile, enormous capital is flooding into the sector, with companies spending aggressively to stay ahead in the AI race. Take the $500 billion Stargate project involving OpenAI, Oracle, and SoftBank. Despite this scale of investment, OpenAI remains unprofitable, and Oracle's rising debt levels to finance such ventures are concerning.
Another multi-billion dollar deal illustrates the questionable economics at play. Microsoft and Nvidia recently invested approximately $15 billion in Anthropic (OpenAI's rival), with Anthropic committing to spend $30 billion on Microsoft Azure cloud services. This allows cloud providers like Microsoft to report impressive growth in "AI Revenue." However, this arrangement appears somewhat circular, the "revenue" is essentially their own investment capital flowing back to them.
The Buffett Indicator, which compares the total value of the U.S. stock market to GDP, currently sits around 215%. For context, it peaked at roughly 200% during the dot-com crash, suggesting the market may be significantly overvalued and a correction could be long overdue.
My Plan Going Forward
Taking the AI's feedback seriously and acknowledging my own growing unease, I'm making several portfolio adjustments:
Reduce tech concentration by taking profits on some positions
Simplify my holdings by trimming smaller positions to create a more manageable portfolio
Adopt a core-satellite strategy: 70% in ETFs for stable, diversified exposure and 30% in high-quality individual stocks
A Reality Check
I'm not a finance expert or quantitative analyst. I recognize my limitations, and I know I'm not equipped to weather a severe market downturn without making strategic changes now. Sometimes the most important investment decision is acknowledging what you don't know and adjusting accordingly.
