Key Points
The S&P 500 has climbed for the past three calendar years, and in spite of various headwinds this year, it’s continued to trek higher. Leading this march are companies that play a major role in the artificial intelligence (AI) space. And investors have generally been piling in, with the idea of benefiting from this boom today and into the future.
But one expert investor in particular has taken just the opposite position. Michael Burry, who shot to fame after predicting the U.S. subprime market crash, increased his bets against AI stocks last year and, in recent times, reiterated his concerns and adjusted his positions accordingly.
Now, just hours ago, Burry delivered his bluntest warning yet regarding AI stocks. Should you listen? Let’s take a closer look.
Burry made $700 million for clients during the housing market crash
First, let’s start by zooming in on Michael Burry. The hedge fund manager, seeing weakness in the U.S. housing market in the early 2000s, placed massive bets against it. His moves, controversial at the time, ended up making $700 million for his clients. The story of Burry and others who predicted the housing market collapse was documented in the movie The Big Short several years later.
Since that time, investors have looked to Burry, with the idea that he may once again predict the next big stock market move. Burry no longer runs a hedge fund — he deregistered his firm Scion Asset Management with regulators last year. He continues to invest, though, and he shares his thoughts about the market in a newsletter.
As mentioned, Burry has been bearish on AI stocks for well over a year, betting against some of the biggest names in the space, from Nvidia to Micron Technology. He’s written about a potential bubble forming and a crash that eventually may unfold. And he’s just grown even more bearish on the space, issuing his bluntest warning yet.
“The bubble in AI may burst sooner than later,” he wrote in his newsletter on Monday, according to CNBC. Burry cited a report by Ares Management that said the AI boom has been depending on the assumption that AI capital spending will continue at high levels.
Burry shifts his AI positions to bet on a shorter time frame
Against this backdrop, Burry shifted to put options from short positions in certain AI stocks, a move that could result in greater gains over a shorter timeline.
Burry made the following moves, according to the CNBC report:
- He dropped his Micron short for put options with a June expiration date and a strike price of around $500.
- He swapped his Nebius short for puts with a June expiration and a “double-digit strike price.”
- He swapped his iShares Semiconductor ETF short with puts expiring next September and a price around $400.
- He shifted his Palantir short and current put into a bigger put position with a September 2027 expiry and a price of about $100.
The risks and opportunities in the market
So, with this, Burry delivers a blunt warning to investors: A crash may be coming, and sooner than expected. Should you listen? Yes, it’s key to listen to the comments and thoughts of successful investors such as Burry; considering a variety of views helps us to understand the risks and opportunities present in the market at a given time.
But when investing, it’s important to remain focused on the long term. Even if the prices of some AI stocks have climbed too far, too fast in relation to current AI spending levels and the revenue opportunity right now, and AI stocks go on to crash, this doesn’t mean the AI story is over. AI is just beginning to be applied in the real world to solve problems and help companies gain efficiency. Any potential decline in AI stocks doesn’t change the overall growth story.
These companies could see a pause in momentum and then return to growth in the months to follow. All of this means that, as always, investors should buy stocks at reasonable valuations and hold through market turmoil to benefit from long-term growth. And if Michael Burry is right and a bubble may soon burst, it might be an opportunity to pick up exciting AI players at bargain prices.
Should you buy stock in S&P 500 Index right now?
Before you buy stock in S&P 500 Index, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $373,352!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,406,241!*
Now, it’s worth noting Stock Advisor’s total average return is 933% — a market-crushing outperformance compared to 212% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology, Nvidia, Palantir Technologies, and iShares Trust – iShares Semiconductor ETF. The Motley Fool has a disclosure policy.
