For investors who saw their portfolios run up in 2025 on the back of the AI trade, there’s both good and bad news.
First, the bad news: A correction could just be getting started. “AI growth is enormous and there’ll be periods when the market has to digest the spend, capital expenditures and the number of players in the space,” Michael Sansoterra, chief investment officer at Silvant Capital Management, told MarketWatch.
“This is actually still pretty small,” Sansoterra said of Tuesday’s stock-market pullback. “The market could do more digesting.”
The Tuesday selloff comes after several Wall Street executives, including Goldman Sachs Group Inc. GS Chief Executive David Solomon, warned of an equity drawdown over the next 12 to 24 months. OpenAI CEO Sam Altman’s recent nonanswer to a question about how the company planned to pay for trillions of dollars of spending with its billions in revenue didn’t reassure AI skeptics, either.
And shares of Palantir Technologies Inc. PLTR, a poster child for expensive tech names, dropped 8% on Tuesday even as the company reported better-than-expected earnings a day prior.
Playing defense
However, today’s market moves provide an opportunity for investors to assess their exposure to tech and adjust accordingly. “I would tell every investor to assess their risk level properly and make sure they can sleep at night,” Sansoterra said.
That could involve taking some profits off the table. One common rule of thumb is to sell half of a holding after it doubles. Of course, the best course of action will depend on the individual investor and their goals.
For investors looking to diversify outside of the well-known tech names, Sansoterra personally favors the aerospace- and defense-tech company GE Aerospace GE. “It’s a stock that’s been taking advantage of not only a cyclical growth window but some secular changes as well, with the way the consumer’s been spending post-COVID,” Sansoterra said.
Other picks for Sansoterra include beneficiaries of the AI trade in the energy space, such as Vistra Corp. VST and Bloom Energy Corp. BE These companies are seeing incremental demand for their products as power becomes a bottleneck for AI workloads.
Today’s stock declines do offer an important reminder to AI investors: Make sure the companies in your portfolio have strong financials. Investors should be invested in the areas of tech that have the best earnings, revenue growth and free cash flow, Sansoterra noted.
“Our advice to investors is to be disciplined about making sure you’re actually investing in the money and not in the story,” Ward added.
It may sound like a no-brainer, but the AI frenzy has created its fair share of speculation. For example, the prerevenue nuclear stock Oklo Inc. OKLO has rallied over 400% this year.
And even among the companies with solid financials and increasing returns, their stocks could still be very richly priced, Ward cautioned. He pointed to the memory space as an example, where some stocks are trading at record-high valuations.
Ward didn’t discuss specific memory stocks, but FactSet data show Sandisk Corp. SNDK trading at three-times forward sales, which is a staggering leap from its five-year average of 0.2 times. Another case of this can be seen with Palantir, whose hefty forward price-to-sales multiple of 79 has intimidated investors despite its track record of revenue acceleration.
“We try not to have a ‘this time it’s different’ mentality,” Ward said of the tech sector generally.
Read: 5 bubble-resistant tech stocks to guard your portfolio from an AI crash
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