The AI Trade Might Be Grossly Underestimated - and It Could Be Time To Rethink How We View the Mag 7

AI market expectations are increasing while the exact stage of the boom remains unclear. Mega-cap technology firms are ramping capital expenditures, which can signal long-term commitment but also raises the risk of overpaying for projects that may not deliver expected returns. Some investors view the AI revolution as still early, while others expect a medium-term correction, including in AI-related semiconductor stocks that have surged sharply. The key question is whether current spending reflects the beginning of sustained growth or limited early gains. Energy and hard-asset constraints are expected to remain central, and significant drawdowns in parabolic areas could occur without being surprising.

"It's pretty hard to know what to believe when it comes to this ongoing AI revolution. The AI bubble calls have been growing louder for well over a year now. And while some folks, including the great Michael Burry of The Big Short fame, might feel as though we're in the lead-up to the peak of the dot-com bubble days, the reality of the situation is that it's really hard to tell where exactly we are in the boom as the mega-cap tech titans ramp up the CapEx, which demonstrates that the risk of missing out might top the risk of losing big money on endeavors that may never pay off, at least to the magnitude that Wall Street expects."

"Any way you look at it, there are major AI bulls out there who think that the revolution is in its earlier innings (maybe the second or third inning, depending on who you ask), while others, including Dr. Michael Burry, think that a correction could hit at some point over the medium term. Given Burry's bearish put options, perhaps that big correction (or maybe something a bit more substantial) in AI stocks - especially semiconductor names that are still going parabolic - might hit by the year's end. Only time will tell if the AI revolution is underestimated or overestimated."

"Up ahead, mega-cap tech is going to do its best to show that the CapEx on AI is money well spent. Some of the early signs have already made their way into the results. The big question is whether it's just the start of something with a parabolic curve or if it's just some low-hanging fruit. Either way, it looks like there's going to be no slowing the AI race as firms look to tackle energy and hard asset bottlenecks."

"In my view, the AI trade might have bubbly parts and pockets of deep value. For the semis, which have gone parabolic, a 50% drop certainly wouldn't be out of the ordinary. Believe it or not"

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