What could possibly go wrong with the AI boom?
Over the past couple sessions, the AI and chip sector have undergone a sharp drawdown due to several factors:
Broadcom sold off after last Wednesday’s earnings after failing to beat elevated expectations. The market reaction made investors worried that AI stocks are priced for perfection.
The window where investors need to raise funds for the SpaceX IPO has opened. Retail brokerages like Schwab are asking its customers for indicators of interest. SpaceX is raising $75b at a $1.75T valuation.
Google announced last week that it will be raising $85b via an ATM equity offering to fund its AI capex spending. This includes a $10b private placement with Berkshire Hathaway. The offering raises concerns that the market won’t be able to digest all this equity supply.
Yields rose sharply on Friday when US non-farm payrolls came in sharply higher than expected. Rate hike expectations for 2026 jumped from 16 bp to 26 bp.
Tensions heated up between Iran and Israel, pushing oil higher by several dollars and stoking stagflation fears.
Despite a perfect storm of multiple negative catalysts, SMH rallied 5% to recover half of its losses on Monday. I see the recent selloff as a healthy and inevitable correction of overheated sentiment and overbought conditions. We could easily chop sideways in an extended consolidation, or be back at new highs within weeks, and neither outcome would surprise me. I have been using the weakness to add to high‑conviction names and introduce one new position. The AI boom still feels early, and the Jevons Paradox flywheel is very much in motion.
Rumors suggest Anthropic’s Mythos release is imminent, which could materially improve the capabilities of Claude‑based agents. If Claude is good enough to reliably find vulnerabilities in code, it is likely very strong at writing and refactoring production‑grade code as well. That is the kind of step‑change that keeps the flywheel spinning.
Still, it is worth asking how the boom could break. In the paid subscriber section, I outline five ways the cycle could stall or reverse, whether due to forces inside the AI ecosystem or shocks from the broader macro and political environment.
