Analyst: How to know when to sell AI stocks

While the S&P 500 erased most of its early losses by Tuesday afternoon, stocks are still on track for their fourth straight daily decline, the longest streak of down days since August.

And it’s fair to say that a number of worries — including a possibly slowing economy, a possibly inflating AI bubble, and a Fed that seems reluctant to cut rates as much as previously expected — continue to weigh on the minds of investors, traders, and speculators.

Plenty of pixels have been spilled over the bubble question in particular, with Alphabet CEO Sundar Pichai and JPMorgan Vice Chairman Daniel Pinto both on Tuesday acknowledging that the surge in spending on AI data centers could very well prove to be one of the periodic episodes of mis- and malinvestment that appear in markets during periods of technological change, easy credit, heady optimism, and government encouragement.

Seeing as the S&P 500 is pretty heavily exposed to AI through its increased concentration in the tech stocks that dominate such market cap-weighted indexes, this has pretty profound implications for even relatively diversified, set-it-and-forget-it index investors, never mind risk-on traders focused on high-profile, AI-exposed names.

But if it is a bubble, is there a chance to get out of those exposures before it pops? In a recent note, Peter Berezin, chief global strategist at BCA Research, wrote that “investors should not wait for evidence that AI capex has rolled over. By the time that evidence is apparent, AI stocks will have fallen considerably.”

Luckily, Berezin suggests some four other areas one might watch for indications that it’s time to hit the eject button.

“1. The first is revisions to analyst capex estimates. Estimates of future capex will likely start falling before actual capex declines. They have been rising briskly, but if they were to flatten out, that would be a worrying signal.

2. The second is GPU rental costs. After staying resilient through May of this year, they have started to come down.

3. The third is hyperscalers’ free cash flow. It has been deteriorating lately, although it still remains quite high in absolute terms.

4. The fourth thing to be on the lookout for is a ‘Metaverse Moment’ – an occasion where some AI company announces a major AI project only to see its stock price fall.”

I don’t know if it would count as a Metaverse Moment or not, but it’s interesting that Nvidia and Microsoft’s decision to invest up to $15 billion in Anthropic has largely been shrugged off.

But let’s say we did feel that we’re seeing the writing on the wall and wanted to decrease exposure to the markets and AI — where would one go?

As we noted yesterday, Goldman Sachs analysts think that if the giant AI soufflé suddenly deflates, it’s going to be rather tough to find a safe place to wait out the rout. AI’s persistent demand for investment capital means corporate bond markets and even government bond markets — typical assets one might buy to avoid trouble in the stock market — might also get whacked amid a downturn. That’s what Goldman analysts meant yesterday when they said an AI rout “could have the potential to push all asset classes down together, making it difficult to hedge.”