How To Invest If You Think The Ai Bubble Is About To Burst

• After Friday's rout, fears about the health of the AI trade have risen.
• Market pros weigh in on how to prepare for a larger correction amid the sector's latest tantrum.
• Skittish investors should consider strategies like barbell investing and adding to defensives.

The bears have a warning for investors: the AI bubble may be close to bursting.

That fear was top of mind last week as the AI trade trade stumbled and then plunged on Friday, with fears about spending and demand hammering away at the optimism that's propped up the bull market for the last four years.

The Nasdaq 100 ended October with its worst monthly loss since March 2025, and is now teetering on the edge of an official correction, with the tech-heavy index down 9% from its early-October high.

Investors are navigating a confluence of worries that include:

• Fears of too much and too little spending. Investors have long worried that hyperscalers are spending too much on AI at a time when the return on investment remains unclear. There's a simultaneous fear that's built in recent months that AI capex could suddenly pull back as some tech giants signal more spending discipline. Such a development could spark a chain reaction along the supply chain that supports the AI buildout, hindering the bull market.
• Hyperscaler finances are starting to deteriorate. Investors are worried about hyperscaler finances, with cash flow turning negative at some firms even amid promises of heftier capex spend in 2027. Amazon, Alphabet, Meta, Oracle, and Intel are several of the giants in the space that are cash flow negative, stoking investor jitters.

To market bears, the contradicting fears are pointing to two conclusions: 1), the AI bubble may be entering its final stages, and 2), it's time for investors to prepare their portfolios for a major upheaval.

"The market message from last week's action boils down to this: both sides of the AI trade are faltering at once," top economist David Rosenberg wrote in a note to clients on Monday, pointing to painful losses in hyperscalers and AI suppliers, like neoclouds, last week.

"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 added.

Bearish investing pros on Wall Street are outlining the ways investors can best position. Here are the three investing strategies they say are worth considering amid rising fears about the AI bubble.

1. Use the barbell strategy

BCA Research highlighted the barbell investing strategy in a note to clients.

The barbell strategy involves investing in both high- and low-risk assets, the idea being that one side of the barbell will provide downside protection if an investment on the other side is underperforming. The strategy allows an investor to have exposure to riskier areas of the market while reducing their overall portfolio risk.

BCA said it remains positive on equities overall, but added it is looking to pile into specific sectors to hedge equity risk in other areas.

"We remain bullish, but with barbells across the portfolio," Juan Correa, the firm's head of portfolio construction, said, adding that the firm recommended overweight positions in technology and healthcare stocks, as well as high-yield credit assets.

The firm added that it upgraded its "tail risk strategies" to an overweight rating, pointing to its bearish put positions against the State Street SPDR S&P 500 ETF Trust.

2. Pile into defensives, hard assets, and dividend-paying stocks

Paul Dietrich, the chief investment strategist at Wedbush Securities, recommended investors add exposure to key areas of the market in order to protect against the concentration risk in markets, as well as broader macroeconomic risks, like hotter inflation and slowing economic growth.

He added that he sees a case for the AI bubble to end before 2027, pointing to how AI investment looks poised to peak in 2026.

Here's what Dietrich recommends for investors' portfolios

• Gold. This acts as a portfolio's "insurance policy," Deitrich said, pointing to the precious metal's status as a safe-haven, often rising as risk-assets fall.

• Healthcare stocks. Healthcare remains the market's "clearest durable trend," Dietrich said, pointing to the need for investment to shift to the sector to support an aging population.
• Commodities (especially copper). A modest allocation to commodities tends to add "resilience" to a portfolio when investors grow anxious about currencies, Dietrich said, adding that copper, given its steep supply deficit, had the "clearest demand story."
• Utilities. This sector has thrived during every infrastructure boom in US history and is considered a key beneficiary of the data center buildout.
• Dividend stocks. These stocks offer an "arithmetic" appeal to investors in an era of higher-for-longer interest rates, Dietrich said. He outlined one example of how a dividend-paying real estate trust could see 5% growth and offer a 6.7% yearly dividend, yielding an annual return close to 12% while remaining less volatile than tech investments.

3. Balance your portfolio while buying the dip

Investors able to stomach the interim volatility in stocks may want to consider buying the dip in a diversified portfolio, Franklin Templeton says.

The firm said it remains "constructive" on US stocks, but expects the tech rotation and high volatility to persist over the near term. That suggests buying on market pullbacks "makes sense" for investors, Chris Galipeau, the firm's head market strategist, wrote on Monday, though he recommended investors add exposure to several areas to maintain balance in their portfolios.

"The earnings bar is high — very high. Any minor misstep has led to punishment, which has led to rotation," Galipeau wrote of the near-term downside risk to equities.

Here are some areas Franklin Templeton recommended to investors looking to diversify:

• Value stocks. Investors should have a balance between growth and value investments, Galipeau said.
• Mid-and small-caps. Investors should also be balancing US large-, mid-, and small-cap stocks within their portfolios, he added.
• Emerging markets and Japanese stocks. Both of these areas are outperforming the S&P 500 year-to-date, with the MSCI Japan Index and the MSCI Emerging Markets Index up 18% and 16%, respectively.