Wall Street AI Volatility Echoes Dot-Com Era as Buffett and HSBC Issue Warnings
Wall Street faces growing AI volatility as surging bond yields and high financing costs spark warnings from Warren Buffett and HSBC strategists over market speculation.
Wall Street indices have recently shown instability as the tech sector, led by artificial intelligence companies, comes under scrutiny. Rising bond yields and financing costs are raising hard questions about big tech spending on AI infrastructure and server farms. For veteran investors, this volatility echoes a historic warning published a quarter-century ago.
In 1999, at the height of the dot-com bubble and when the S&P 500 completed a 200% surge in four years, Warren Buffett published a landmark essay in Fortune magazine. Buffett warned investors against blind investment in revolutionary industries, using the airline industry as an example: although airplanes changed humanity, 129 airlines went bankrupt in the two decades preceding his article.
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow," Buffett wrote. "Rather, it is determining the competitive advantage of any given company and, above all, the durability of that advantage." Shortly after, the dot-com bubble burst, and hundreds of tech companies were wiped out even though the internet changed the world. Today, Wall Street evaluates that a similar scenario might occur in the AI sector: technology will change the world, but many companies riding the hype could crash.
The Buffett Strategy vs. Short-Term Volatility
An interesting sign occurred recently when, over 12 trading sessions, Berkshire Hathaway shares jumped 7%, while the semiconductor sector ETF plummeted 15%. Such a dramatic gap in favor of Buffett's traditional holding company versus the chip sector was last seen in October 2001, right during the bursting of the internet bubble.
While Buffett calls on investors to hunker down in high-quality companies for the long haul, others believe the AI stock frenzy requires an opposite approach in the short term: an aggressive and fast tactic. Max Kettner, chief multi-asset strategist at HSBC, warns that retail investors chasing the AI rally simply do not understand the new market rules.
"The big challenge right now is that you formulate a fundamental investment view for half a year ahead, and in practice everything materializes within a single week," Kettner said in an interview with MarketWatch. "The market today is driven so much by technical considerations, positioning, and things entirely detached from macro data or basic economics."
Risk Management in the Age of AI
Kettner explains that the chip sector has become cyclical and volatile at extreme levels. For example, within just three months this year, Asian chip stocks plunged 40%, recovered in a flash 25% rally, and returned to a downward trend. His message to AI investors sharply contradicts the buy-and-hold approach.
"You must take profits and deploy exceptionally tight stop-loss orders. You have to be much more disciplined in your risk management than simply saying 'this is a great economic story, I will just buy and hold for 12 months and ride out the volatility'. You cannot do that, because this volatility can easily translate to a quick 15% to 20% loss."
Kettner noted that the pace of trading in markets has changed dramatically since the COVID-19 pandemic, partly due to increasing leverage among traders, amplifying swings in both directions. Therefore, at HSBC, exposure is currently preferred via the Equal-Weight S&P 500 index, reducing the impact of tech giants until profitability questions regarding AI investments clear up.
