We are about to see the largest IPO in history. We have companies engaging in circular financing similar to the year 2000. We have no clear revenue plan for most of the massive investments in data centers. What could go wrong? If you go looking, the mind will see what it wants to see. Let's break it down and understand what markets are asking and the potential responses by firms.
The big issue going into next year is a clear path of profits for the trillions of dollars we are going to spend on AI infrustructure. We don't have that yet, and when places like Microsoft report slower than expected uptake on AI revenues (i.e. people aren't signing up for AI services as fast as expected), markets pause. When cash machines like Facebook suddenly start borrowing billions to build out AI, not to mention debt hog Oracle, markets get the jitters. But if the revenues follow, and the money flows, it's hard to knock down higher valuations. While we may not be there yet, if earnings don't start catching up with earnings (they have over the last few months!), the day of reconing will come sooner and be more painful.
The good news is that the hot AI names have paused over the past 4 months and let earnings catch up. You can also see value stocks killing it during that same time period. Thus, diversification isn't dead, it's doing what it's supposed to do, and overall markets are healthy. Let's keep an eye on it.