RJ Hamster
While Other Investors Chase Hype, Do This Instead
Eric Fry
Editor, Smart Money
DAILY ISSUE
While Other Investors Chase Hype, Do This Instead
Hello, Reader.
Imagine you have a tiny pebble in your hand. You stand on the shore of some calm water. Then, you toss your pebble in, breaking the serene surface.
The disturbed water ripples out, creating expanding rings, but becomes still after a short time.
Now, imagine you hold a boulder. You drop it in the water. Splash! Waves slosh out in all directions. It’s a much messier affair.
The Magnificent Seven stocks are a lot like that overweight boulder.
In 2015, Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Meta Platforms Inc. (META), Microsoft Corp. ( MSFT), Nvidia Corp. (NVDA), and Tesla Inc. ( TSLA) made up around 12% of the S&P 500.
Today, they make up roughly 35%. Each one a heavy boulder.
A large portion of their market dominance is due to artificial intelligence.
This kind of immense growth may make these companies appear rewarding and unstoppable, especially as several of them reported better-than-expected earnings this week.
However, for a boulder-sized company, minor disappointments, missteps, or even perceived fears can trigger outsized reactions in an overconcentrated market.
In fact, today’s AI boom is checking important boxes that indicated a bubble back in 1999… which is why I want investors to proceed with caution, especially as glittering headlines could make the Mag 7 seem appealing right now.
Even a pretty boulder is still a boulder.
So, in today’s Smart Money, I’ll explain why you’ll want to avoid the dangerous weight of the Mag 7 companies, despite their “magnificent” earnings…
Then, I’ll show you calmer waters to invest in instead.
Let’s jump in…
Recommended Link
When the AI Crash Comes, These Six Stocks Could be the Biggest Winners
When bubbles pop, money rotates to quality. Eric Fry found businesses with proven models AI can’t touch: a drive-through beverage chain with a cult following, an outdoor brand so beloved that customers tattoo its logo on their bodies, and more. These “AI Survivors” are the stocks you want to own before the bubble pops. Details here.
The Warning Signs Are Flashing
Meta, Microsoft, and Tesla reported earnings on Wednesday afternoon, all beating earnings-per-share and revenue estimates. Apple followed on Thursday, also delivering better-than-expected results.
Almost every share price surged in response… except Microsoft’s, which dropped roughly 10% in after-hours trading.
There were signs of a slight slowdown in Microsoft’s cloud growth. The company’s Azure and cloud services revenue slowed slightly, growing 39% compared to last quarter’s 40%.
Notably, investors were nervous about AI-related spending. Microsoft’s quarterly capital expenditures and finance leases reached $37.5 billion – up 66% from last year and above Wall Street’s $34.3 billion prediction.
As shares of MSFT slid, it brought the S&P 500 and Nasdaq Composite down with it, the two major indices ending Thursday down 0.13% and 0.72%, respectively.
In short, as the Mag 7 enter their middling years, the broader indices will feel the weight.
Generally speaking, proactive preparation works better than reactive repairing. The best time to reinforce your house is not when the hurricane is already tearing off the roof, but while the sun is still shining.
I expect any future AI bust — whenever it arrives — to rhyme with the dot-com bust. Here are two main reasons why…
- Extreme concentration. The top 10 stocks represent 40% of the market (vs. 23% in 2000). That means that a stumble by just one or two of those stocks can be an anchor that drags down all stocks.
Microsoft’s decline this week is a smaller-scale example. We saw a larger-scale version back in December, when the major indexes experienced four straight days of losses, driven by selloffs in prominent AI companies. - Circular financing. In the dot-com era, companies and others began lending money to their own customers, creating circular deals and artificial revenue.
Similarly, OpenAI is buying billions of dollars in Nvidia processors… while Nvidia is investing $100 billion in OpenAI.
These characteristics should ring alarm bells, as they highlight unsustainable practices that put stocks at risk, particularly during earnings season.
What the Dot-Com Bust Taught Me
I return to the dot-com era because the strategy I used then may be just as useful now.
Back then, it became clear that betting heavily on market leaders was driven by hype. So, I shifted toward dependable, non-internet stocks. The pebbles.
The same principle applies today: You don’t have to buy overpriced, speculative AI boulders just because they dominate headlines.
In the late ’90s, you could have said “no” to frothy dot-com stocks and instead invested in stocks like American Eagle Outfitters Inc. (AEO), Best Buy Co. Inc. (BBY), homebuilder NVR Inc. (NVR ), or energy company Frontier Oil.
None promised to revolutionize the world… nor did they have a game-changing internet strategy. But all raked in huge gains as the internet boom burst.
They provided quality goods and services at the exact moment when investors picked reality over hype.
From 1996 to 2005 – while the S&P 500 returned less than 8% a year – Frontier Oil rose more than 3,500%… Best Buy gained over 4,000%… NVR climbed nearly 5,000%… and American Eagle gained nearly 8,000%.
Similar opportunities exist today. I call them “AI Survivor” companies – businesses that don’t depend on AI hype to succeed but are positioned to endure this unpredictable landscape.
At Fry’s Investment Report, our portfolio includes non-AI companies that I believe offer stability and upside in an increasingly overconcentrated market… where a single misstep by a big name can ripple through everything.
Click here to learn more about safeguarding your portfolio.
Regards,
Eric Fry
Editor, Smart Money
P.S. AI Survivors are one of the tools that can help protect your portfolio during periods of market turbulence – which is exactly the kind of market my colleague Luke Lango believes is taking shape this year. While the AI boom continues to fuel markets, the approach to investing in it has evolved.
In his new Genesis Mission broadcast, Luke explains how Washington is actively funding, fast-tracking, and steering the buildout needed to win the AI race… and how investors can join in. Click here for all the details.
