Nasdaq 100 enters correction territory. How to hedge against an AI bubble burst.
Investors are worried that AI spending is too high and that it could be trimmed
The global AI race has fueled a borrowing binge that is increasingly making investors uncomfortable / Photo: DCStockPhotography / Shutterstock.com
The tech-heavy Nasdaq 100 fell 1.4% on Monday, closing 10.4% below its October 6 all-time-high close and officially entering correction territory. October marked its worst month since March 2025. The final week was especially rough for tech stocks as Alphabet’s quarterly earnings report deepened concerns about the cost and financing of the AI boom, Bloomberg reports. Strategists have offered three ways to respond, Business Insider writes. Investors can pair safer assets with riskier ones, add defensive stocks and commodities, or buy stocks on pullbacks.
Balancing the AI trade
Investors have long worried that hyperscalers, the largest operators of cloud platforms and data centers, are spending too much on AI with little visibility on returns. Meanwhile, the opposite risk has emerged in recent months. Some tech giants have signaled greater spending discipline, raising the possibility of a sharp pullback in AI capex. Such a move could set off a chain reaction among suppliers, Business Insider notes.
David Rosenberg, founder of Rosenberg Research, pointed to steep losses last week in shares of both cloud giants and AI equipment suppliers. “When stocks on both sides of the same trade fall on opposite news, the problem is the trade itself. In short, the market is pricing in a lower return on AI spending,” he wrote to clients. Here are three strategies investors can use to position their portfolios in case the AI bubble bursts.
A barbell strategy. BCA Research recommends holding both higher- and lower-risk assets so that the safer holdings can cushion losses when riskier ones fall. BCA remains bullish on equities overall and recommends overweight positions in tech and healthcare stocks, as well as high-yield credit.
Defensive stocks and real assets. Wedbush Securities Chief Investment Strategist Paul Dietrich sees a case for the AI bubble deflating by the start of 2027, with AI investment expected to peak this year. He recommends gold, which he calls an “insurance policy” for the portfolio, along with healthcare stocks, copper, and dividend plays.
Buy the dip. Asset manager Franklin Templeton remains positive on U.S. stocks but expects volatility to stay high in the near term. Chris Galipeau, its head market strategist, says market pullbacks offer a chance to buy stocks at a discount. “The earnings bar is high – very high. Any minor misstep has led to punishment, which has led to rotation,” he wrote.
Will the AI bubble burst?
State Street CEO Ron O’Hanley sees little cause for concern in the AI market for now, saying demand supports the massive investments going into the technology. “It’s not like these data centers are being built on spec. I mean, there’s real orders behind them, and in most cases, there’s real companies behind them,” O’Hanley told Bloomberg Television. “So right now, it’s hard to see that’s a bubble.”
“A bit of a market selloff was probably overdue,” O’Hanley said of the decline. “It certainly doesn’t seem disorderly at this point.” He acknowledged the risk of building more data centers than needed. “The question will be whether does AI become more efficient, such that all the capacity that’s being built we don’t need now,” he said.
Companies have raised more than $650 billion in debt in less than two years to fund the AI race, according to data compiled by Bloomberg. Speaking at an investment summit in Hong Kong on Tuesday, Goldman Sachs CEO David Solomon said capital markets would continue to finance the AI infrastructure buildout. “There will be robust financing to meet the demand,” Solomon said.
